High street lenders and building societies are beginning to cater to the growing requirement for contractor mortgages. In the past, contractors may have found it difficult to obtain the funds required to buy a home or move to a suitable mortgage deal while remortgaging. Today contractor-friendly mortgage lenders are evolving and are becoming more flexible underwriting mortgage applications for contractors.
Contracting is very lucrative for some and is popular among professionals who work as freelancers. Locum doctors and IT contractors are now more commonplace.
However, a risk associated with working as a contractor is that there can be gaps between the time you finish one contract and start a new assignment.
What is an acceptable gap between contracts from a mortgage point of view?
Many contractors use the contract rate route to secure a mortgage. The contract rate route looks at the year’s gross contract value and is popular among new contractors and first-time buyers.
Mortgage lenders indeed prefer clients with less risk, excellent contracting history, and a good credit score. The mortgage process can be complicated if you have a gap between contracts and plan to use a day rate contracting route.
How the gap between contractors is assessed differs from lender to lender. In general, the contract worker needs continuous employment of 12 months or more with six months of the contract remaining, or the mortgage borrower has two years of continuous service in the same type of jobs.
If a contractor uses a day rate method, most mortgage lenders look for a history of 12 months. Some lenders consider the application with a 12 weeks gap between the contracts, whereas some lenders consider a maximum of six weeks.
However, this does not mean that a contractor cannot secure a mortgage when there are gaps between the contracts. It is always good to seek a mortgage broker’s assistance.
Are there other routes for contractors with gaps between contracts?
If the gap in employment is greater than required by a contractor friendly lender there are still other methods to prove income.
A contractor can be treated as self-employed, which is the traditional method. A contractor needs to be a director using their limited company with more than 25% shareholding to be considered self-employed.
A contractor can use their income shown in their tax documents or the salary and dividend income if it fits the affordability calculator of a lender. If a self-employed route is followed, most mortgage lenders will require a minimum of two-year self-employed history. Few lenders will consider a one-year trading history as well.
What documents are needed by a contractor to prove self-employed income?
Generally, lenders request the tax calculation (SA302), tax return (SA100), and the HMRC tax overview. The tax calculation shows income earned and tax bill due for the year.
Mortgage providers may also require an accountants’ certificate to calculate the mortgage affordability.
High street banks and building societies may require the last few months of business bank statements to confirm if the business is still sustainable.
Can contractors show annual accounts instead?
Yes. This is another method to prove income if the person is a contractor with gaps between contracts. However, not all lenders accept this route.
Some lenders will consider the mortgage applicants’ share of limited company profits and the director’s salary. Most of these lenders will view the contractors’ share of net profit. However, some lenders would allow profit before tax, which may be a little more favorable.
The general practice is to provide two-year limited company accounts. However, some lenders would consider one-year accounts. The accounts need to be signed by a chartered accountant or an accountant from an acceptable accounting body specified by the lender.
Mortgage lenders require the company accounts not to be older than 18 months. Be cautious as some lenders will not consider accounts more aged than 15 months. It is always good to align the Accountant with these deadlines as it is much earlier than the companies house and HMRC deadlines.
Can a lender consider gaps between contracts in exceptional circumstances?
Yes, mortgage lenders have considered exceptional circumstances. A mortgage applicant may require speaking to them in advance and agreeing on the exception before the mortgage application.
We have witnessed exceptions where a contractor has been on maternity or extended maternity or has taken parenting time. We have also had exceptions where there have been bereavements in families. Some contractors have had to take time off for medical reasons and have still been considered.
Generally, contractors applying for a buy to let mortgage will be treated as a self-employed applicant. Banks are likely to look at your tax document and company accounts. However, significant gaps may impact your current year’s earnings and may require specialist underwriting. Some lenders would also consider new contractors with no contracting history.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.
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