How to get one
Being a contractor can offer you flexibility and independence, but also uncertainty – especially when buying a home. But as the number of freelancers and independent contractors in the UK climbs, don’t despair – many mortgage lenders could be willing to lend to you, even if your income jumps around. This guide tells you exactly how lenders will assess your mortgage application and what steps you can take to improve your chances of getting approved.
How much of a mortgage can contractors borrow?
The mortgage supplier will first work out how much to give you when you apply for a mortgage-known as an affordability evaluation. It will look at how much you usually earn, how much you spend and how safe your revenue is. You will generally have to demonstrate proof of your income history for at least the previous six months as a contractor, although many lenders will expect to see two to three years of accounts. This may make it more hard to apply for a mortgage early in your career as a contractor, although you may still have alternatives.
How the earnings of a contractor is evaluated for a mortgage
If you’ve been a contractor for a long time, lenders will often average the revenue you’ve earned in latest years to estimate your average revenue. They will then use this average to determine how much each month you can afford to repay. For instance, if in one year you earned £ 40,000 and the next £ 45,000, the lender may assume that your annual income is around £ 42,500. However, if your profits have changed dramatically from year to year, a mortgage lender is unlikely to use this strategy. In these cases, as an indication of your earning capacity, they may take the last year or the lowest. This could imply that you could borrow a lower amount than you would otherwise.
How to strengthen your mortgage application as a contractor
Offering a larger deposit – and so borrowing a smaller amount – is one way to improve your chances of success. The less risk a bank takes in lending to you, the more favourably they will view your application. Lenders will also look for signs of long-term security. If you can produce an ongoing agreement with an employer, or evidence of past agreements that are likely to be renewed, this may make your application more appealing to lenders. While taking breaks between stints may be one of the perks of contracting, minimise time off in the lead-up to buying a home – lenders may be wary if they see you out of work for more than eight weeks in a 12 month period. In addition, consider how good your credit score currently is and whether you need to work on improving it before submitting a mortgage application. This may be even more significant for contractors, as lenders will look for evidence of good financial management when your income is not guaranteed. You’ll also need to show evidence of your expenses and operating costs – the more information you provide, the better the lender can understand your financial situation and feel confident lending to you.
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