Today’s topic is First Time Buyer contractor mortgages. It’s very specific and we’re going to give you as much information as possible.
As always, if you’ve got any questions, send them in – they could be featured on another episode or I will answer them specifically on my social media.
Is it harder to get a mortgage as a contractor and a First Time Buyer? How does it work?
It’s not necessarily the link between being a First Time Buyer and a contractor. It’s the link to a contractor mortgage. It is a bit harder, because you’ve got to have more paperwork than normal, and you’ve got to be a bit more organised with it to prove your income.
There are all sorts of different types of contractors, day rates and industries that people contract in. A lender needs to see your contracting experience and what that income looks like. That’s the tricky bit. But with a good broker, you should be able to get everything in order. It’s just not as easy as getting pay slips together.
How long do you have to be a contractor to get a mortgage?
Lenders like to see at least a 12-month history of being a contractor, and some lenders like you to have two years’ contracting. They also want to know that you’re continuing in the same field of work.
A lender needs to feel secure and happy that you’re going to continue to earn what you’re earning. With contracting, you can get really generous day rates on one particular contract and then a very different rate on the next. Your earnings could really vary over a period of time, which is why they need to see a longer period of income than the norm.
How much can I borrow for a mortgage as a contractor and a First Time Buyer?
Firstly, it depends what type of contractor you are. If you’re an IT contractor, for example, depending on how you’re paid and what your contract looks like, you can actually be classed as employed with some mortgage lenders. It can really help people’s affordability if that’s the case.
It’s a very particular type of calculation using your payslips, invoices or commission statements. You’re treated differently because these are CIS contractor mortgages.
If you’re a standard contractor, it’s very much governed by your last year or two years’ P60s. That P60 will tell us what you earned overall for the last year and potentially the year before.
We’ve seen that quite a bit recently where lenders want to see the P60.
Another way it’s calculated is based on your day rate. There’s a specific calculation, which we’ll come onto, but it’s how a lender will get a figure for your annual income.
How is a mortgage calculated for a contractor / First Time Buyer?
Every lender’s different. And if you’ve listened to this podcast before, you’ll hear me say this in every episode. Every single lender does something different, and that’s why the mortgage-broking industry exists.
The most common calculation that I see is your day rate times five, for the five days in a week. Then, to get a year’s earnings, instead of multiplying by 52 as you might expect, it’s actually by 46 weeks – that’s an industry average to allow for breaks and holidays. You sometimes see them go up to 48 weeks.
That total would be your income for a mortgage application. Typical mortgage lending might be 4.5 to 4.75 times that income, or your joint income, if there’s two of you. Potentially there could be up to four people on a mortgage, which we see quite a lot now.
Some lenders offer five times that figure – or less than that – but 4.5 to 4.75 is a good place to start. We can give you your exact affordability calculation with a multiple range of lenders, and then you know exactly how much you can get.
What documents do I need to apply for a mortgage as a contractor and a First Time Buyer? How do I prove my income?
For a normal mortgage, you need your proof of ID so we know you are who you say you are. Proof of residency confirms where you live. It’s the proof of income that’s different for a contractor.
We need to see your contracts. So if you are a contractor, please be organised with your paperwork. Get yourself a filing system. I’ve got one in my cupboard with different slots to keep contracts all in one place – then it’s easier when it comes to getting a mortgage. We’re going to want to see those and so is the lender.
We’re going to want to see your P60s to see what you’ve actually put through and earned on paper for the last few years. We need bank statements as well, because part of our job is making sure your budget allows for that monthly payment, plus hopefully your life insurance and protection. Your bank statements tell us how you spend your money and how frequently money is coming in and out.
What if I have bad credit as someone who is a contractor and looking at my first mortgage?
You’re treated just the same way as if you had bad credit and you weren’t a contractor or First Time Buyer. We will find a lender that’s comfortable with the bad credit you have. It really depends on the type of bad credit we’re talking about. We’d look at your credit report in great detail with you.
You provide the background – because behind all bad credit is a story around why it’s happened. A lender wants to understand that, how long ago it was, and whether it’s going to happen again. All of those factors will come into their decision making. Our job is to scour the market to find you the best possible deal taking that bad credit into account
My biggest piece of advice is to speak to a professional about it. A lot of people just hide when they’ve got bad credit. They don’t want to talk to anyone. They feel embarrassed. We understand all of that, and the more information we have, the better.
People do make mistakes, but we’ve seen many of them come out of bad credit and go on to buy houses and have a great report with a long-term plan behind them. Lean into the support from a professional. In essence, being a contractor with bad credit is no different to being anyone else with bad credit trying to get a mortgage.
Can I get a Buy to Let mortgage as a First Time Buyer contractor?
Buy to Let mortgages are based on your rental income on that property, plus the deposit you’re putting down. The only reason income would get taken into account is if that calculation with the rent didn’t work, and we need to do something called top slicing.
That’s where we use a little bit of your income to boost any shortfall from the rent expectation. If that was the case, I’d be giving you some really good advice to just make sure that is the right investment for your money. We’d check it’s the right property, because if the rent isn’t high enough you need to think about your profit and your yield from it.
You can absolutely get a Buy to Let mortgage as a First Time Buyer contractor if it’s the right property, right rental value and right deposit. It really isn’t about being a contractor at that moment.
Being a First Time Buyer landlord can have more effect. Some lenders aren’t happy if you haven’t had experience of buying a property before, but others will let you do it for the very first time with them. Again, it’s about making sure you talk to someone that can find that lender for you.
How can I improve my chances of getting a mortgage as a contractor and a First Time Buyer?
Be as organised as possible and keep your credit score clean. That’s always a good tip for someone that wants to get a mortgage. As a First Time Buyer, the first step is making sure that your credit report is really healthy. As a contractor, it’s to be organised.
The biggest problem contractors have is gaps between their contracts – lenders don’t like that. They like to see continuous contracts to feel confident that you’re going to carry on contracting at a steady rate.
Keep your paperwork and think ahead. When one contract ends, what’s going to happen next? How big is that gap going to be? Trying to preempt that is good – it could be the difference between you getting a mortgage or struggling and having to wait a bit longer.
Finally, speak to a professional – that’s always my biggest advice. We know what we’re talking about and a contractor mortgage is slightly different to the norm. You’re not expected to know all that when there are people that do this day in, day out.
As a First Time Buyer, try to get educated and empowered about the process of buying a property. The more you learn at the beginning, the better you’re going to be when it comes to your remortgage, and the better decisions you’ll make in the long term with your money.
Get the right person beside you and they will be with you throughout your property journey and set you in good stead for the future.
How do I apply for a mortgage as someone who is a contractor and a First Time Buyer? How can a mortgage broker help here?
A mortgage broker can help because we translate the market, and educate you on what the lenders are thinking. We explain why we might choose one lender over another, and help you navigate through it.
We save you a lot of time and energy, presenting you with lenders that are happy to work with you based on your contract and your history. It’s going to be a much more positive experience all round. A broker is your advocate in the mortgage industry to find that perfect mortgage for you.
To apply, speak to a mortgage broker first and we’ll have an intensive conversation to start with – because we want to know everything. We want to see your contracts and know your history. We want to know your goals for the future. We want to know where you’re heading, and where you’ve been in your career so far.
Plus there are all the details around name, address, income and employment history for both applicants. It’s worth investing that hour or two initially, because it will save you so much time and energy later on.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.