A mortgage is the most important and probably largest financial decision you will make during your lifetime.
Contractors are no different to any other person who’s decided to become self-employed and as such the banks are very happy to deal with you on the same terms as they do anyone else not in a permanent employment capacity.
That being said, you still need to comply with the universal criteria which is where we’ll get started!
Universal Criteria for Mortgage Applications
It’s worth stating from the outset that there are common criteria which everyone has to comply with (irrespective of employment status) when applying for a mortgage.
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Applicants will always be required to put down a deposit in order to qualify for a mortgage. The criteria don’t change just because you are a contractor. It’s 10% for 1st Time Buyers and 20% for everyone else
Loan to Income
You are capped at 3.5 x your income. If it is a joint application, then this is a combim the joint amount. The banks are capable to offer exceptions to this rule but only for a limited percentage of mortgage applications.
The Banks will want to see that you have clearly demonstrated a capacity to repay the mortgage you have applied for. They stress test this repayment by assuming a 2% increase in the mortgage interest rate and will want to see that you have been able to live without the amount for at least the previous 6 months. You can demonstrate this in the form of a rent payment, savings accumulated over the period or a loan repayment which is due to finish prior to the mortgage being drawn down.
All mortgages are underwritten based on your previous credit history. Whether you are contracting or not, if you have had any issues with this in the past you will find it difficult to navigate past this when it comes to getting approval.
5 Frequently Asked Questions
How long do you need to be contracting to get a Mortgage?
Here lies the GREAT news! Whether you are an Umbrella Company Director/Personal Limited Company Contractor or PAYE Umbrella Contractor, we can now facilitate a Mortgage Application with only 1 years Contracting Employment (some banks require up to 3 years).
Ideally, you would have a second follow-up contact in place with the same employer to give yourself the best chance of getting approval * subject to the usual lender criteria.
Will I need a bigger deposit if I’m contracting?
Absolutely not. You’re subject to the same criteria as everyone else (10% deposit as a 1st time buyer and 20% for everyone else).
Do pension contributions affect my mortgage application?
No. Whether you are in an Umbrella Director/PAYE or have your own Personal Limited Company, all banks see pension contributions are being a ‘discretionary’ expenditure and therefore don’t count against your ability to borrow.
What happens if I leave contracting? How long do I have to wait to get approval as an employee?
Most banks want to see that you are at least 6 months into a new role and have been made permanent in the position.
What if my partner is also self-employed?
It doesn’t make a difference other than they too will need to provide at least 2 years business accounts. There isn’t a penalty for both parties being self-employed.
Here are some tips to help get yourself mortgage approval as an Independent Professional Contractor:
Keep your Personal Finances in order
Whether you are contracting or not Banks don’t like to see things such as bounced direct debits or going into your overdraft.
Remember that they are only looking for the last 6 months Bank statements so it’s vital that these present the very best picture of your financial management.
Avoid lengthy breaks between contracts
One of the perks of contracting is that you can take breaks between contracts for holidays, family time etc.
You must remember that you are being assessed on a specific 1–2-year period so you will want to make sure you have earned as much as possible in that period of time in order to enhance your repayment capacity.
Maintain a good credit rating and demonstrate a strong savings history
It is essential that you have a good credit rating in order to secure a mortgage. Any loan and credit cards repayments should be paid on time as any missed payments could result in your application being declined.
Lenders will also need to see that you have a consistent savings record. If you are earning more now that you are contracting it is good practice to save as much as you can, particularly for the 6 months prior to mortgage application as this is the largest determinant of your capacity to repay the loan.
It is also worth noting that, as a contractor, you will generally be on a higher rate than a comparable permanent employee which can make it easier to save.
Find a mortgage broker who understands Contracting
It is always considered best to use an independent Mortgage Broker when trying to source a Mortgage as they will effectively do the ‘shopping around’ for you and also make sure you’re getting the best deal for you on the market.
Finding a broker who understands contracting is essential. Over the last number of years, lenders have become more cautious, and Independent Professional Contractors have found it difficult due to a lack of understanding of their work.
Some banks are unsure of how to deal with Contractors as they don’t fit the standard criteria. Humdinger have been facilitating Mortgages for Independent Contractors for almost 10 years and have a thorough understanding of the market.
Have all the required Documents
If you are self-employed you will need to provide at least 2 years of certified accounts. Your payroll solutions provider can provide written confirmation of your employment and confirm your tax affairs are in order.
The Central Bank limit on borrowing is 3.5 times your gross income. In some cases, you can apply for an exemption which will allow you to borrow in excess of this limit.
You will need to be realistic about the monthly repayments you can afford to make. It is important to remember that interest rates may go up and you should concentrate on how much you can afford rather than how much you can borrow.
Make regular payments to online gambling websites
Banks take a negative view on this type of activity but it’s not a zero-tolerance policy.
The occasional €10 here or there for Cheltenham isn’t going to cause a problem.
Borrow prior to drawing down the mortgage
It might sound straightforward but it’s always an issue when a borrower decides to, for example, take out a loan to change their car during the mortgage approval process. You will want to present as strong a case as possible to the bank and taking on additional debt prior to drawdown certainly won’t help your case.
Humdinger Mortgages is an award-winning mortgage brokerage based in Dublin City Centre.
With over 15 years’ experience managing clients’ mortgage requirements, Humdinger bring a straight-talking approach when it comes to helping clients get mortgage approval.
The only promise they make is that they’ll do everything they can to help you!
You can get in touch with the team at Humdinger by emailing firstname.lastname@example.org or by calling 01-2557981.