How does the contractor mortgage application process work?

If you’re a house hunting contractor, you may not know where to start when it comes to applying for a mortgage. The situation is certainly more challenging than those in traditional employment as lenders can struggle to take a comprehensive view of your income and accurately assess affordability based on your total earnings.

As a result, you will need to go through a complex assessment and qualification process to get a mortgage as a contractor. But first, how does the contractor mortgage application process work?

1. Choose a specialist contractor mortgage advisor

Your very first step should always be to engage with a specialist contractor mortgage advisor, such as Freelancer Financials.

High street lenders don’t tend to offer mortgages to contractors, freelancers or small businesses as it can be difficult to prove your financial worth in the traditional manner where you have a guaranteed monthly income.

However, a specialist mortgage advisor will understand the remuneration model often used by contractors who set up a limited company and use a low salary/high dividend source of income. Your advisor can present this model to the lender going forward. If you use an umbrella company, a specialist advisor can also help you to effectively prove your income to a lender.

2. Be honest about your financial situation

Once you have found a specialist contractor mortgage advisor, you need to be completely transparent about your financial situation.

You should be aware of some show-stopping issues, which may prevent you from successfully applying for a mortgage as a contractor. These include:

If you’re not currently in a contract - lenders have no reference point for your income and this makes it very difficult to prove your income.
If you have a bad credit history - if you have existing issues such as bankruptcy, missed mortgage payments or CCJs, this can also affect your mortgage rates. If these issues have occured in the last two years, they may make it impossible for you to get a mortgage altogether.
If you don’t pay UK tax - if you pay absolutely no UK tax, then most lenders view your circumstances as too risky and you may not be able to apply for a mortgage.

However, a solution may be viable to any of these issues if you engage with a specialist contractor mortgage advisor early enough into your house hunt.

3. Confirm your basic income details

You will need to provide details of your current contract and its payment terms to your mortgage advisor. You may also be required to provide an up-to-date CV to prove your employability and past copies of previous contracts may also be required at this stage.

If you’re coming to the end of a contract, don’t panic. As long as you have another contract lined up and can provide details on it, your lender will be able to underwrite your mortgage based on your new contract income.

Generally speaking, most lenders ask for the following information from contractors:

Your current contract
Your CV
Your past contracts, depending on your profile
Proof of address
Proof of ID
Three months of personal and business bank account statements

Following on from the Mortgage Market Review in 2009, your bank statements are particularly important to prove the affordability of your proposed mortgage to the lender. They will also help lenders gauge your spending habits, so make sure you keep your accounts clear of the following red flags for lenders:

Regular and/or excessive overdrafts
Payday loans
Gambling activities
Jobseeker’s allowance payments (particularly if these are accompanied by a contract during this period)

4. Evidence of a deposit

The final hurdle for many contractors is to provide proof of a deposit for their mortgage. If your deposit will come from the sale of another property, you will need a letter from a solicitor to confirm this.

If you are using your savings as a deposit, you will need to provide a statement of your savings account. Due to money laundering regulations, the lender is also likely to investigate your account to check the deposit money has actually come from your money.

A specialist contractor mortgage advisor can help you to prove the source of your deposit if, for example, the money is coming from an overseas account or business.