First Time Buyer Contractor Mortgage
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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Podcast approved by The Openwork Partnership on 05/09/2024
First Time Buyer Contractor Mortgage
David Sharpstone talks to us about how the mortgage process works if you are a First Time Buyer and a contractor.
Is it harder to get a mortgage as a contractor and a First Time Buyer?
Getting a mortgage as a contractor and a First Time Buyer could be sometimes a little bit more challenging, compared to somebody in more traditional, secure employment. But it’s certainly not impossible to get a mortgage.
Lenders typically see contractors as being slightly higher risk, due to the perceived instability of income. You may earn £200 a day – or whatever your day rate is – for a limited amount of time. But lenders understand that your earnings might actually be more stable or even higher than those in full-time employment.
The key difference lies in how your income is assessed by a mortgage lender. Instead of using standard payslips, as with an employed person, lenders are going to look at your contract history and the details of your current contract.
They’re going to want to know how much your day rate is and how long is left. Then they’re going to look at your track record of income over the last few years. It certainly presents a few more challenges, but working with a broker will make things easier.
How long do you have to be a contractor to get a mortgage?
For a better chance of mortgage success, I would always recommend to my clients to have at least two years of contracting history. But if you only have 12 months’ history it is still possible. 12 months’ history is the absolute minimum; two years is preferred.
A two-year period allows mortgage lenders to assess the stability of your income over a longer period of time, and see that it’s consistent. It’s not just a flash in the pan.
One or two specialist mortgage lenders might even consider less than 12 months’ contracting history. If you’ve got experience in your industry, maybe as an employed person or even self-employed, some lenders accept that history of you doing that same role in a different way.
How much can I borrow for a mortgage if I’m a contractor and a First Time Buyer?
Whether you’re a First Time Buyer or a home mover, it doesn’t really make any difference to the amount that you could borrow.
The first thing that will affect your borrowing as a day rate contractor and First Time Buyer is the day rate on your contract. Then, the lender looks at the outgoings you’re committed to. Are they things that could easily be given up, or are they financial commitments for the next three or four years? These might include car finance, loans, credit cards or store cards.
They’ll look at whether you have any financial dependents – children or vulnerable adults. Someone applying for a mortgage with no children, no loans or credit cards could typically borrow somewhere between four and five times their income.
If you earn, for example, £200 pounds a day and you work five days a week, that’s £100 gross income per week. Allowing for three to four weeks holiday per year, that £1,000 would be multiplied by 48 times to get your annual income – £48.000.
A lender will then multiply that by four to five times – and that will be the amount you could borrow.
How is a mortgage calculated for a contractor that is a First Time Buyer in the UK?
This is almost the same as the previous question. Just to reiterate, the borrowing is based on your day rate and outgoings. You might have additional income such as benefit income, or money from a different source, such as rental income. That all goes into the pot.
Standard income multiples for a mortgage lender are somewhere between four and five times your annual income. That will give you a rough idea of the amount you could borrow.
Obviously, for a more accurate number, speak to a mortgage broker that specialises in contractors. We’ll take a look at your paperwork and your credit file to calculate the maximum you could borrow.
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What documents do I need to apply for as a contractor and a First Time Buyer? How do I prove my income?
The documents you’ll need overlap, whether you’re employed, self-employed or a contractor. You’re going to need government issued photo ID and address identification.
You need to show bank statements to evidence income coming in from your contracting and your day-to-day spending. If you’ve got a separate account to pay bills, you’re going to need typically three to four months’ statements from that too.
To evidence your income as a contractor, a lender will usually expect to see a copy of your signed contract. Importantly, it must be signed by all parties and should state the start date, end date, who you’re working for and how much you’re going to be paid per day or per week for that work.
We would also request copies of the last two or three years’ contracts, so get that information ready. It also helps to have copies of your tax returns, as these help build up a full picture of the situation.
What if I have bad credit as a contractor looking at my first mortgage?
You could still get a mortgage if you have some bad credit as a contractor and First Time Buyer.
It will depend on the severity of bad credit. That could be anything from one or two missed payments on a credit card in the last 12 months, right up to full bankruptcy. The severity and frequency of the bad credit will impact your ability to get a mortgage as a contractor.
If you’re contracting and you have something quite severe on your file, definitely speak to a mortgage broker. It could be very challenging to find the right solution given the fact that you’re contracting on a day rate and you’ve got some bad credit as well.
Can I get a Buy to Let mortgage as a First Time Buyer and a contractor?
Yes, it’s possible to get a Buy to Let mortgage as a First Time Buyer and a contractor.
The overriding issue will be proving to the mortgage lender that this really is a property you will let out – there’s no risk that you’re going to live in it. Your actual income and how you’re paid is a lesser issue.
A mortgage lender that accepts First Time Buyers and first time landlords will have very specific criteria on assessing your income. Even though this is going to be a Buy to Let mortgage, they need to ensure you’re not borrowing more than you could potentially afford to pay back.
They would still look at the value of your contract and apply a multiple of four to five times your annual income. So if you earn £200 pounds a day, £1,000 a week, on a Buy to Let basis, the maximum you’d be able to borrow would be somewhere between four and five times £48,000. That’s also going to be impacted by the perceived market value for the rent.
How can I improve my chances of getting a mortgage as a contractor and a First Time Buyer?
To have the chance of getting a mortgage, I would wait until you’ve got a two year track record of being a contractor.
Make sure that you’ve got good records of your income for the last two years. Check you’ve got your contracts signed. If they’re not, go back to the people that you’re working for.
Get bank account records together to back everything up. Saving for a slightly higher deposit will certainly help, because it reduces the risk to the mortgage lender. Aiming for a 15% deposit rather than 5% or 10% will make you a far more attractive candidate.
Work on improving your credit score if necessary. If you’re not registered to vote where you’re living, get on the electoral roll. That’s one of the main things that mortgage lenders will look at.
If you have no credit, look at taking out a credit building credit card. I’m not suggesting you should get yourself into debt, but you could use the card to buy your food shopping every week and then pay that off once a month. You’re not accruing interest on it, and you’re building up your credit history.
All these things will have a positive impact on your ability to get a mortgage as a First Time Buyer and a contractor.
How do I apply for a mortgage to someone who is a contractor and a First Time Buyer?
If you’re feeling very confident and you’ve got all your paperwork and contracting history, you could walk into a high street bank and ask if they cater for contractors. See if they have any specialist criteria for contractors, or if they will just treat you as a regular self-employed customer.
But if you’re not feeling brave enough to do it yourself, seek out a mortgage broker who’s used to dealing with contractors and First Time Buyers. They will know which lenders will put you in the right position for mortgage success, and will offer you the most favourable terms.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Approved by The Openwork Partnership on 05/09/2024
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