Monday, May 13, 2024

How To Get A Contractor Mortgage

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Getting A Mortgage When You’re Paid A ‘day Rate’


Some lenders may be willing to calculate your annual income on the basis of your day rate, though many require you to have a 12-month contract for this to be an option.

In this case, lenders will take your daily rate and multiply it by the number of days you generally work per week, then multiply that out to the full year. Be aware that lenders will also want to factor in any holidays and gaps between contracts, so most will assume you only work 46 and 48 weeks per year.

Tips For Qualifying For A Mortgage As A 1099 Worker

Now that youve got your down payment sorted, lets look at 7 more tips that will help you get approved for mortgages for 1099 employees:

  • Watch your credit score You need to keep track of your credit score. You cant manage and improve something without knowing what it is. Pay your bills on time and follow other tips that can build your credit score.
  • Review your last two tax returns These two documents could help to determine your average monthly income. Add them up and divide it by 24 . This shows your average monthly income for the past two years. This will also help to manage your expectations regarding what you can afford.
  • Reduce debt-to-income ratio A high debt-to-income ratio may cause lenders to reject your application for a mortgage.
  • Increase compensating factors Some lenders may approve a below-average application for a mortgage if there compensating factors that increase the likelihood that you will repay the loan. Reasons like a large down payment, substantial savings, or minimal increase in housing expenses after the home is owned.
  • Reduce your taxable deductions Now this may sound hard to do. Certain independent contractors have many taxable deductions. But reduce it to increase your taxable income. A higher taxable income could convince lenders you are eligible for a mortgage.
  • Specialist Lenders Responding To Self

    Its the specialist, off-the-high-street lenders who have been quickest to respond to the needs of the new borrowers.

    After all, this is the workforce of the future, and many forward-thinking lenders would like to fill out their books with the handsome earnings that many experienced contractors can command.

    What’s required is a more flexible, bespoke approach to mortgage applications, and particularly to applications for substantial borrowing.

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    Can 1099 Workers Qualify For Mortgages

    The first question is can 1099 workers get mortgages? The short answer is, yes. But its a bit more complicated than just a simple yes. Dont worry though, because after this youll understand how to get your mortgage.

    The first step to getting mortgages for 1099 employees is prequalification. This is as simple as phoning your bank or completing an online questionnaire with the basic information on your Form 1099 income report, debt, and assets. These details should be able to give you a quick estimate of the amount you can afford to borrow to buy your home with.

    Please note though, prequalification does not mean you are approved for a loan. It only helps you gather an estimate for the amount you can borrow. For instance, a real estate agent may ask for your pre-qualification letter from a lender to find homes that fit your budget. Once youve found the home you want, you can get your things in order to mortgage the property.

    We Make Mortgages Possible

    How to Secure a Construction Loan to Build Your Dream Home ...

    Over 50% of mortgages for people who are self-employed or have bad credit arent available directly to you. Theyre only available through specialist brokers. Using our platform guarantees youll be matched with a broker who has a proven track record of making mortgages possible for people like you. Less processing, more understanding.

    Also Check: What Questions Do Mortgage Lenders Ask Employers

    Gather Relevant Documents And Information

    Like any mortgage application, you will need to provide relevant documents and information to your broker. First, you will need to have evidence of your income and what you spend. This allows us to assess how much money you will be able to afford to pay back with your mortgage.

    You will also need proof of ID, proof of address, and evidence that you have the money for your deposit. Additionally, you will need a copy of the contract you are working on, as well as proof of past contracts. You may also need your current CV.

    Finally, you will also need 3 months of business and personal bank statements.

    How Much Can I Borrow On A Mortgage If Im Paid A Day Rate

    Some lenders will be willing to calculate your annual income based on the day rate you charge. This is particularly useful if you left salaried employment only recently to work as a contractor.

    They will want to see evidence of your qualifications, arrangements with previous employers and signed contract agreements, and evidence of employment availability in your field.

    Your daily rate will be multiplied by the number of days per week that you usually work. They will want to allow for holidays and gaps between contracts, so most will assume you only work between 46 to 48 weeks a year.

    Example of day rate mortgage borrowing calculation

    If your day rate is £350 and you generally work four days a week to fit around childcare commitments:

    Weekly earnings: £1,400

    Annual earnings : £67,200

    If youre a very highly rewarded specialist a financial risk modelling consultant, for example, or a change consultant its possible that your annual income could be edging towards the £300K which would qualify you as a High Net Worth Individual , in which case a range of high-value, unregulated lending is available to you.

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    Why Do Contractors Struggle

    Theres a number of reasons contractors may struggle when it comes to their mortgage applications disproportionately to those with conventional incomes. The self-employed sector now makes up a whopping 4,355,000 arguably too many to still have to explain how your income works to high street lenders at this significant number you should be able to approach your mortgage application without excess paperwork and hassle.

    Historically, this is the main reason you may experience difficulties in your mortgage application as a contractor a lack of understanding when it comes to non-standard methods of working and evidencing income. This doesnt mean you should be any less eligible to borrow but can often result in needlessly rejected applications, higher interest rates, and reduced borrowing potential when you arent dealing with a specialist broker like CMME who understand your income.

    If, like most people, your mortgage is a huge milestone, an indicator of your professional and personal success as well as being a significant financial commitment, the last thing you need is to be blind-sided by hurdles in your application. Thats why were giving you a heads up, so you can be prepared and get the specialist help you need to fulfil your mortgage potential.

    Do You Have An Example Of A Day Rate Mortgage Calculation

    Mortgages For Contractors | How To Get A Mortgage On A Day Rate |

    If your day rate is £400 and you generally work four days per week, your estimated annual income would be around £76,800.

    £400 x 4 days = £1,600 per week

    £1,600 x 48 weeks = £76,800

    This approach can be especially helpful if you only recently left full-time employment and do not have an established track record. In this situation, lenders will want to see evidence that youre likely to succeed as a contractor, including previous experience and qualifications in your field, signed agreements and an existing network.

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    How Much Can Contractors Borrow On A Mortgage

    When you apply for a mortgage, the mortgage provider will first work out how much to lend you – known as an affordability assessment. It will look at how much you generally earn, what your expenses are and how secure your income is.

    As a contractor, you will usually need to show evidence of your earnings history for at least the past six months, though many lenders will expect to see two to three years of accounts. Due to this, applying for a mortgage early in your contractor career can be more difficult, though you may still have options.

    How Many Years Of Accounts Do I Need For A Self

    Youll need at least two years of certified accounts in order to comfortably apply for a self-employed mortgage, and preferably three years or more if you want access to the best deals. Ideally, these accounts should have been prepared by a qualified and chartered accountant to prove your reliability. If youve only got accounts for one year or less, it may be more of a challenge to prove that you can afford a mortgage. A mortgage broker can be particularly helpful in this scenario to find a mortgage deal for you. You can improve your chances if you can show that youve got regular work and/or evidence of future commissions to show how youre planning to maintain your income.

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    Can I Get A Contractor Mortgage With No Broker Fee

    Whilst its true that some brokers dont charge fees, fee free contractor mortgage brokers tend to focus on simpler cases. We are often approached by those who have been turned away, and the experts we work with are able to help.

    The contractor mortgage advisors we work with only charge on success, so they will refund any upfront broker fees if they fail to secure an agreement in principle for your contractor mortgage and will even do so if the deal breaks down at a more advanced stage than this.

    Get in touch to speak with a mortgage broker with experience in your type of contracting work.

    What Deposit Will I Need As A Contractor

    Commercial Construction Loans

    How much deposit youll need to put down will depend on your individual situation, and will vary between mortgage lenders. But remember, the more money you put down as your deposit, the more of the property youll own right away, and the smaller your mortgage needs to be.

    Mortgage lenders have their own criteria to work out how much of a risk it would be to lend money to you. But its not that different for a contractor than those employed full-time. Most lenders will ask for a minimum 10% deposit for a typical residential mortgage.

    How much you can borrow will not only depend on your loan to value, but also your earnings track record, and how long you want to commit to a fixed-interest rate for. You may be able to borrow more if you commit to a longer fixed interest rate because the lender will have confidence you can repay a set monthly amount ongoing.

    Read more in our Guide: Mortgage Deposits and Income Multiples Explained.

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    What Lenders Offer Contractor Mortgages

    If your income is fairly consistent and youve been employed for a long time period, some high street banks might be open to approving your application even if youre a freelancer or contractor.

    There are now a large number of specialist lenders offer mortgage deals tailored to contractors, including some that cater to specific professions.

    If youre a contractor or freelancer, it can be valuable to speak to a mortgage broker. They can help you find a lender that accepts mortgages from people in your situation and help you to navigate the application process.

    The Five Elements Essential To Contractors To Get The Right Mortgage For Them

    There are five essential elements that self-employed contractors need to get a mortgage:

  • Up-to-date CV, including details of work history and their current contract
  • A copy of that contract, which should also show how long it has left to run
  • Three months bank statements
  • Proof of ID, UK passport, driving license and/or utility bills in your name
  • The telephone number/email address of a proven specialist mortgage broker.
  • Before we get into the meat of this guide, heres a quick pop quiz. Whats missing from the above list that inexperienced advisors may have asked you for?Anyone? The answer: accounts!

    For genuine contractor mortgages, accounts arent amongst a lenders list of criteria. Underwriters cant base what you can afford moving forward on what youve earned in the past.

    If youve only bought a home as a permie, an advisor not asking for payslips might seem odd. But such is the nature of contracting. Moreover, looking forward is a notion that lenders have embraced.

    What is important for working out affordability is the day rate on your contract. How long youve been contracting in your current niche is right up there, too.

    Most lenders ask for bank statements showing that you earn what your contract states. The majority who do ask like to check your personal bank statements. This avails them of added insight, showing other expenditure you incur.

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    How To Get A Mortgage As An It Contractor

    If you work as an IT contractor, you may not feel confident about getting a mortgage due to not having a fixed income. However, just because you dont earn exactly the same amount of money year after year it doesnt mean that you cant buy your own home, and there are definitely options available for you.

    Here, we take a look at how to get a mortgage as a contractor and some of the steps you can take to ensure that your application is successful.

    Mortgage Requirements For Contractors

    How Contractor Mortgages Work – From Daily Rate IT Contractor to Zero Hour and Fixed Term Contracts

    As we mentioned earlier in this article, contractor mortgage lenders will be interested in how long you have been trading for and how long is remaining on your current contract when determining your eligibility and calculating how much you can borrow. Factors such as whether your contract has ever been renewed and the type of contractor you are may also be considered.

    You can find more information about how these variables come into play in the Who can get a contractor mortgage section? section at the top of this article, but there are other factors the lender might consider when determining which rates to offer and whether to offer you a deal at all.

    Contractor mortgage age limits

    Some contractor mortgage providers will only lend to borrowers on fixed or short-term contracts if they are aged over 25, and there are mortgage lenders in general who impose upper age restrictions. At some, its 75, others 85, and a minority will impose no maximum age restrictions, as long as they are confident you will be able to pay off the contractor mortgage into retirement.

    If you fall outside of these age parameters, its important to seek advice from a specialist contractor mortgage broker to ensure you end up with the best rates.

    Contractor mortgages with bad credit

    The mortgage type

    Generally speaking, most mortgage lenders would only be willing to offer repayment mortgages to fixed and short-term contractors, so getting an interest only contractor mortgage can be tricky.

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    First What Is A Contractor In The Eyes Of A Lender

    Mortgage lenders will usually consider you a contractor if:

    • Youâre self-employed
    • Youâre working with a company on a short or fixed term contract
    • Your rate of pay has been agreed for the length of the contract

    You may also count as a contractor if youâre an agency worker or on a zero-hours contract. The main thing is youâre taking on one contract at a time.

    On the other hand, a lender will probably class you as a freelancer if youâre self-employed and working with several clients at the same time. Even though youâd have multiple streams of income in this scenario, some lenders may view a freelance portfolio as less reliable than a single, longer-term contract.

    Help To Buy Contractor Mortgages

    The governments Help to Buy scheme provides a low interest loan to beef up the size of a borrowers deposit to help them get a foot on the property ladder. Some contractors will be eligible for the scheme, and like everyone else, they will need to contribute 5% of the deposit themselves and the property theyre in the market for must be a new build worth up to £600,000. It must also be their main residence and the mortgage type is limited to capital repayment.

    The equity loan will cover 20% of the cost of your home, so you will need a 5% deposit and a 75% mortgage. You wont be charged fees on the loan for the first five years of your home ownership.

    Although its very much possible to apply for the Help to Buy scheme if youre a contractor, the way some lenders assess your affordability and declarable income could complicate the deal and put you at risk of ending up on unfavourable rates or being turned away altogether.

    Its therefore essential to seek specialist advice from a broker with access to the entire market if youre after a Help to Buy contractor mortgage. The advisors we work with can connect you to the lender best positioned to offer you a good deal under these circumstances.

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    Are There Contractor Mortgages For Limited Company Borrowers

    Yes, but finding a specialist lender is important if you trade this way. There are specific mortgage providers who will allow Limited Company customers to borrow based on dividends or profits, rather than the annual salary they pay themselves, which may be significantly lower.

    Get in touch and the whole-of-market advisors we work with will help you find the best mortgage for contractors who trade as a Limited Company.

    How Can I Get A Mortgage As A Contractor Or Freelancer

    Business Loans For Contractors

    The way we all work has changed dramatically over the past few years, no less in the last few months, and in todays economic climate it has been interesting for us as a business to see the changing way in which our clients are working.

    Often were asked can I get a mortgage as a contractor? the answer is yes, you can!

    There seems to be an increasing number of applicants who now work on a non-standard flexible basis whereby a permanent PAYE position gives way to either a self-employed, freelance or contractor basis.

    Whereas it used to be the preserve of those in the IT specialist or media world who work on various short-term contracts, now we are seeing a growing number of industries, from medical to finance and graphic design to teaching, choosing this option of increased flexibility.

    For many it is a precursor to full self-employment and setting up a limited company, whilst for others working as a contractor is simply an easier and more profitable way of working.

    The issue for this growing number of contractors is that mortgage providers have struggled to understand these working patterns. Previously, lenders may not have offered mortgage loans to those who have less than 3 years of accounts, or only have a defined contract period. So how can you get a mortgage as a contractor? Read our helpful guide below for our top tips.

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