How To Get a Mortgage As a Contractor or Freelancer?
Yes, you can get a mortgage as a freelancer, but it may be slightly more challenging than for salaried employees. This is because lenders typically perceive self-employed individuals as having a higher risk profile due to the fluctuations in income and lack of traditional employment benefits.
What are the lending criteria for the Contractor?
The lending criteria for contractors can vary depending on the specific loan product and the lender, but here are some general guidelines:
Income verification:
- Tax returns: At least 2 years of tax returns (SA302s in UK, 1099s in US) are usually required to prove income consistency and growth.
- Profit and loss (P&L) statements: These statements provide detailed information about your business’s financial health and profitability.
- Bank statements: Regular income deposits and sufficient reserves demonstrate financial stability.
- Invoices and contracts: Copies verify current workload and projected income.
- Audited financial statements: Required for incorporated businesses.
Creditworthiness:
- Good credit score: Typically above 620 for competitive rates.
- Low debt-to-income ratio: Ideally below 36%, demonstrating your ability to manage debt.
Additional factors:
- Down payment: A larger down payment reduces risk for lenders and leads to better loan terms.
- Loan type: Consider loans designed for self-employed borrowers, like non-conforming or non-qualifying mortgages (NQM).
Can I take out a contractor mortgage with another person?
Yes, you can take out a contractor mortgage with another person. It can even be advantageous to do so. Here’s why:
Advantages of a joint mortgage:
- Increased borrowing power: Combining your income with someone else’s allows you to qualify for a larger loan amount. This can give you access to more expensive properties or enable you to pay a larger down payment.
- Improved chances of approval: Having another borrower with a stable income can increase your chances of getting your mortgage application approved, even if your income as a contractor is less predictable.
- Shared financial burden: Sharing the monthly mortgage payments with another person can make it more affordable, especially if you buy an expensive property.
- Shared responsibility: You and your co-borrower will share responsibility for the mortgage, which can be helpful if one of you experiences financial difficulties.
How much money can I borrow as a contractor?
Key factors influencing your loan amount:
Income:
- This is the most crucial factor. Lenders typically use a multiple of your annualized income to determine your loan amount. This multiple can range from 4.5 to 5 times your annual income for contractors.
- If you don’t receive a regular salary, lenders may consider your daily or hourly contract rate to calculate your annual income.
- If you don’t receive a regular salary, lenders may consider your daily or hourly contract rate to calculate your annual income.
- Being inside IR35 means your income is treated like an employee’s, making mortgage qualification easier.
- As an outside IR35 contractor, lenders will be more cautious due to the perceived higher risk and may require additional documentation.
- A good credit score (above 620) indicates responsible financial management and can increase your borrowing potential.
- Aim for a ratio below 36%. This means your monthly debt payments shouldn’t exceed 36% of your gross monthly income.
- A larger down payment reduces the loan amount and demonstrates financial stability, improving your chances of securing a favorable loan.
What documents do I need to get a mortgage as a contractor?
Getting a mortgage as a contractor can require additional documentation compared to salaried employees. Here’s a general list of documents you might need to gather to support your application:
Income verification:
- Tax returns: At least two years of self-assessment tax returns (SA302s) are usually required to demonstrate consistent income and growth.
- Profit and loss (P&L) statements: These detailed statements offer insights into your business’s financial health and profitability.
- Bank statements: Regular income deposits and sufficient reserves showcase financial stability.
- Invoices and contracts: Copies verify your current workload and projected income.
- Audited financial statements: Required for incorporated businesses.
Financial stability:
- Credit report: A good credit score (typically above 620) indicates responsible financial management.
- Proof of assets: This could include savings account statements, investment portfolios, or property ownership documents.
- Debt obligations: Provide details of existing loans, credit card debts, and other financial commitments.
Personal information:
- Passport or driving license: Photo ID for identification purposes.
- Proof of address: Utility bills or bank statements confirming your residency.
- Employment history: Details of previous contracting work or business ventures.
