March 29, 2023
Buying a home of your own is an exciting prospect. Buying a house for your family and knowing that you have something tangible and solid for your investment portfolio is also an exciting prospect. But buying a house as a contractor can be a little more challenging than for a traditional employee.
As a contractor, your income can - and often does - fluctuate. This is especially the case if you work for yourself and this may make some lenders hesitate to offer you a mortgage. The good news is that with the right approach, it's entirely possible to secure your dream home. There are several strategies that you can use to strengthen your case and make sure that you can still move through the home buying process with ease. We've put together a list of 10 essential tips to keep in mind when you're buying a house as a contractor.
One of the first things that you should do if you're a contractor is familiarise yourself with the contractor mortgages available to you. There are specialised programmes out there and contractor mortgages that can take into account the unique nature of your job.
You are not the same as salaried workers, which means that your income is usually variable and that can make it very hard to meet strict lending criteria. The trick here is knowing which criteria is typical of traditional lenders on which criteria you could meet to still obtain a mortgage. A contractor mortgage could allow you to use your contract income and payment history as proof of stability.
This is in place of the traditional employment history that you would have to provide. It's important that you talk to a broker who specialises in contractor mortgages to explore options that would work best for you.
You have to be able to prove your income as a contractor. Lenders will need to see and they'll want to see that you have a steady income before they get a preview for anything.
You may not have a typical pay slip as a contractor, so to be able to show stability, you have to keep comprehensive records of your income. These records include any contracts you may be working, invoices after payment, and bank statements to prove that regular payments are happening for you. Lenders may also ask for evidence of your tax returns, and usually they could ask for up to three years. It's important that you file any tax claims on time and keep records of any deductions or expenses that you claim, too.
Lenders want to see that you have a steady income, and as a contractor, you may not have a typical payslip. To show stability, it’s crucial to keep comprehensive records of your income. This includes contracts, invoices, and bank statements that show regular payments. Lenders may also ask for evidence of your tax returns, so it’s vital to file your taxes on time and keep records of any deductions or expenses you claim.
You do realise that you don't have to do this alone? Working with a qualified accountant can be hugely beneficial to you when it comes to buying a house as a contractor.
Accountants can organise your finances, ensuring that everything is in order for the application before you go ahead. There are so many steps to a mortgage application, and having somebody with financial acumen look over it for you is really going to help.
You need to present your financial situation in the best light to any lenders, so having an accountant's support could improve your chances of being approved.
While you're dealing with brokers and accountants, you might find it's easy for you to continue saving for his larger deposit as possible. It may not be possible for you to buy a home outright, but you can put a huge mortgage deposit down and save yourself some money.
Lenders will view you as a contractor as a high risk borrower. This is because your income potential could be inconsistent. The larger your deposit, the less risk the lender perceives, and that can increase your chances of getting approval. If you can get at least 20% of the down payment together, it will give you a much better chance of securing a mortgage at a competitive interest rate.
It's important that you get familiar with your credit score and any blemishes or marks on your credit file. Your credit score will play a vital role in your abilities as a traditional mortgage even as a traditional borrower, but as a contractor, it's essential to maintain a healthy one.
Lenders will work to assess your creditworthiness, to see whether or not you are worthy of lending the money for a house. It can seem unfair, especially if you've been paying somebody else's mortgage every month on time. Make sure that you pay off any outstanding debts, avoid missing any payments, and keep your credit card balances if any low.
If you're not sure about your credit score then you should check it regularly and take the steps that you need to improve it. You'll be pleased to know that a strong credit score can often offset any concerns a lender may have.
Working with a mortgage broker who has experience in dealing with contractors can make all the difference to you. Finding the right experts can really make a difference to somebody who is looking at self employment and still wants to buy a home.
Brokers will help you navigate the mortgage market properly, making sure that you're getting the best deal every step of the way.
The best thing about being a contractor is working for yourself, and lenders want to see that you have a consistent work history. Even if this history is not through traditional employment, they'll still want to work with you if you have a solid history ahead.
You should have been working as a contractor for at least two years, which means that lenders will have a track record that they can rely on. If you have been contracting for less time, consider waiting until you have more years under your belt before you apply.
Lenders will assess your debt to income ratio. This is the percentage of your income that goes towards any debt repayments. Managing your debt carefully is always going to be important so make sure that you pay off anything outstanding before you go ahead and apply for a mortgage.
It may be something to buy a new car or invest in something else, but if you're looking to get a mortgage you need to put a hold on your spending. Taking on any additional debt right now is not a good idea.
Try to keep your financial situation as stable as you can, so that the months leading up to your application are going to be fruitful.
It's very easy to get lost in the dream house situation but before you start looking at properties, you really need to look at what you can afford. Your income can vary month to month, so budget carefully. Factoring in any monthly expenses, anticipated mortgage payments, taxes, insurance, and even potential home repairs should all be on your list.
