Are you interested in the possibility of obtaining a mortgage as a contractor? Your eligibility for a contractor mortgage will be determined by if you meet the lender’s requirements.
We will outline the necessary contractor mortgage criteria that impact your eligibility and offer guidance to assist you in navigating through the process below.
Various factors influence contractor mortgage eligibility. Each mortgage provider establishes its own set of criteria for mortgage approval. Consequently, while one lender may decline an application, another might approve it. In terms of mortgage prerequisites, lenders typically assess eligibility based on the following criteria:
- The loan amount requested
- The size of the deposit
- The type of property being purchased (lenders may be more cautious with high-rise flats, ex-local authority properties, homes constructed from non-standard materials, properties above commercial premises, and listed buildings)
- Employment status (Particularly key as a contractor)
- Existing debts
- Regular expenses
- Credit score
- Affordability of the mortgage
You can use our mortgage calculator to estimate the amount you may qualify to borrow.
Prior to extending a mortgage to you for the purchase of a property, mortgage lenders establish certain requirements to ensure your ability to repay the loan. These requirements typically include:
Deposit
A larger deposit results in a better loan-to-value ratio (LTV), which is the percentage of the property value you need to borrow with your mortgage. A higher deposit leads to a lower LTV, increasing the likelihood of mortgage approval.
Income Verification
As a contractor, you don’t fit the standard mortgage application tick boxes. Limited company contractors may be asked to provide trading accounts, whilst umbrella company payslips can often cause confusion with lenders. As a contractor mortgage specialist, we have access to lenders who will verify your income based on the gross contract value.
Monthly Expenses
Lenders inquire about existing loans, credit cards, household bills, and insurance policies. They also assess regular expenses such as maintenance payments, school fees, childcare, and commuting costs. Additionally, they may ask for estimates of other living expenses and may require bank statements for verification.
Credit Score
Your credit score reflects your creditworthiness and significantly influences mortgage approval. A higher credit score enhances your chances of securing a mortgage and accessing better deals with lower interest rates.
Age Requirement
While the minimum age for a UK mortgage is 18, lenders may impose an upper age limit for mortgage approval, typically expecting the mortgage to be repaid before the borrower reaches a certain age, often around 75.
Stress Testing
Lenders evaluate your ability to meet mortgage repayments under various scenarios, such as interest rate increases, job loss, or changes in family circumstances. Stress tests may involve assessing affordability under increased interest rates, for instance. In the case of a joint mortgage application, lenders assess the financial circumstances of all applicants involved.
To assess your likelihood of securing a mortgage, it is advisable to apply for a mortgage Agreement in Principle (AIP). While an AIP does not guarantee a mortgage offer, it provides a reliable indication of your potential acceptance by a lender. Please note that certain agreement-in-principle applications may necessitate a hard credit check, impacting your credit report and becoming visible to other lenders.
If you are purely looking for an estimate of your borrowing eligibility, you can utilise our mortgage calculator, which does not involve a credit check or require personal information. Our mortgage eligibility checker will provide you with an approximate amount you may be able to borrow.
What will I need to provide ?
In order to demonstrate your eligibility for a mortgage, you will be required to provide specific documentation to mortgage lenders. This includes:
Proof of identity and financial standing
Essential for adhering to mortgage affordability regulations and anti-money laundering protocols. For identity verification, you must present the following to your potential lender:
- Your passport
- Your driving licence
- A council tax bill
- Utility bills dated within the last three months (excluding mobile phone bills)
- Bank statements
- To verify your income, you will need to furnish the lender with:
- Current Contract
- Umbrella Payslips from the previous three to six months
- Bank statements from the past three to six months (from the account where your salary is deposited)
Why would I be declined
There are several common reasons why individuals may be declined for a contractor mortgage:
- Poor credit history: Mortgage lenders assess creditworthiness through credit checks. Instances of late payments and numerous credit applications within a short timeframe may signal financial management challenges. To enhance your chances of mortgage approval, consider improving your credit score over approximately six months.
- Excessive existing debt: Credit cards and loans impact your credit report. A high volume of these financial obligations or delinquencies in repayments could indicate financial strain.
- Insufficient income: Mortgage offers typically adhere to a maximum of four to four and a half times your annual income. If your desired mortgage amount exceeds this ratio in relation to your earnings, your application may be declined.
- Unstable income source: Lenders view inconsistent employment or irregular earnings, common among self-employed individuals, as higher risk factors. If there is doubt regarding your ability to meet repayment obligations consistently, your application may be rejected.
- Inadequate deposit: Lenders usually require a substantial deposit, typically around 10%, to approve a mortgage. While some lenders may consider lower deposit amounts, such as 5%, these options are less common. For an estimate of your potential mortgage borrowing capacity, you can utilise our mortgage calculator.
As a contractor, it is imperative your application is presented in the right way to potential lenders. To find out more, speak with one of the team today on 02394 211122