Published by: Guest Writer Lucy CromwellUnderstanding what you can do to speed up the process is key, especially if your self-employed or work a zero-hour contract.
Whether it's your first time applying for a mortgage or you're unsure if a self-employed status will impact the outcome, there are a number of ways to ease the stress.
These simple steps will increase your chances of being accepted and help you get onto the property ladder:
STEP 1: Understand how lenders define a contractor
Before applying for a mortgage, understand how lenders view the term ‘contractor’ and how if this will impact your application.
A contractors could be someone who is: self-employed, on a fixed-term contract, work on a zero-hours contract or be an agency worker.
STEP 2: Work with a broker
Brokers have a dedicated understanding of the market and know which lenders are most likely to accept you based on your circumstances.
This can take the stress and hassle out of finding a lender. But most importantly it can speed up the process, and time is an asset during the home buying journey.
A contractor broker will be best placed to help you find a lender that aligns with your employment situation and to get an Agreement in Principle - which will be beneficial when you start searching for properties and eventually putting in an offer on your ideal home.
The Agreement in Principle isn’t a confirmation that your application will be approved, but it does showcase that you’re a good fit for at least one of the products a lender offers. It also signals to estate agents, when you come to offer, that you’re in a good position to move forward.
STEP 3: Stick to your limits
Budgeting with any property purchase is important, but even more so when you’re working with an irregular income.
Lenders will use different methods to assess affordability based on your finances, so naturally, the amount you can borrow will depend on the lender you’re applying for a mortgage with.
However, when it comes to how your income will be assessed, most lenders will use the following formula:
- Contracted day rate x number of days worked each week = weekly income
- This figure is multiplied by 48 weeks for your annual income
- Your annual income will be multiplied by 3, 4 or 5 to give you your maximum mortgage amount
(The reason for this varying figure is determined by what the lend will offer you.)
Other factors will be taken into account, such as how long you’ve been contracting for and your credit score.
Knowing the maximum you can afford is essential – you don’t want to find your dream property, only to find out that it’s out of your budget.
STEP 4: Check your financial health
On the subject of credit scores, your financial health plays a critical role in the mortgage application process.
Usually two to three years’ worth of accounts is required to prove your income and a healthy credit score.
Establishing or renewing agreements with businesses you work with to indicate current and future stability, can boost your appeal in the eyes of a lender.
While you won’t necessarily need a bigger deposit than a standard employee, the more savings you have, the better, as this will reduce your loan to value (LTV) rate – and more attractive as an applicant.
Most lenders accept a 10% deposit for a contractor mortgage, but others may require more. The more you put down, the more favourable your position will be. It will also give you access to better interest rates, which will mean lower monthly payments.
STEP 5: Get the right documents together
With a standard residential mortgage, you’ll need to show bank statements to prove your earnings, but contractors may need to provide more documents.
Your broker or lender will explain precisely what’s needed, but in most cases, bank statements, invoices, proof of your experience and your day rate, as well as SA302 tax calculations will help.
It is a good idea to prepare in advance to speed up the application process. The more evidence you have, the stronger your application will be as you’ll be deemed less of a risk by lenders.
Contractors will benefit enormously from planning in advance when it comes to applying for a mortgage, to not only speed up the process but also to improve their chances of being accepted by the lender.
From working with a broker with experience in contractor mortgages to making sure your financial health is in check and boosting your deposit as much as possible, these tips can help you prepare for the complex journey of applying for a mortgage.
Sowerbys' team can put you in touch with local and recommended experts in the industry.
Chat to a property specialist today at your nearest branch.