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Can Contractors get a Mortgage with a Poor Credit Score?

Even with a spotless credit history, as a contractor you might face a lot more difficulties than a conventional employee when applying for a mortgage, especially with a high street lender. If you couple this challenge with also having had credit problems in the past–anything from a few missed store card payments to a more severe issue such as a County Court Judgement or even bankruptcy–then you could be forgiven for thinking that securing a mortgage for yourself might be impossible.

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A few years ago this might have been the case, and certainly in the wake of the 2008–9 financial crisis, lender’s criteria and lending regulations became a lot tighter, making life very tricky for contract workers looking for a mortgage. However, as the economy has recovered and more specialist lenders have entered the market, there are many lenders who are more flexible in their approach and who are more understanding about how contractors operate and how their income is structured. With contractors and other self-employed people also now making up a considerable portion of the UK workforce, their mortgage needs represent a significant sector of the market that lenders of all varieties cannot ignore.

More lenders have developed mortgage products to suit contract workers, even those with bad credit scores, especially smaller, specialist lenders who cater for niche-market customers with specific circumstances. It can still be possible to get a contractor mortgage with a poor credit score.

The Right Lender and the Right Broker will make a difference

You will be aware that most lenders’ assessment methods and applicant criteria–particularly those at high street banks and building societies–are simply not geared for contractors, nor people with bad credit ratings. Policies and affordability assessments based solely on net take-home pay and an applicant’s previous credit history are not very flexible and don’t account for the nuances of a contractor’s earnings, nor unfortunate events in the past.

Such narrow guidelines don’t take into account the complexities of a contractor’s income stream–especially if you have structured your business as a limited company and draw your earnings as a basic salary plus dividends to make it as tax-efficient as possible.

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However, there are more specialist lenders who adopt a more flexible approach, and take into account other factors in your income strategy outside of the blunt details. They will consider using your contract day or week rate to calculate an indicative figure for your annual income, include dividends with your income and also maybe recognise profits retained in your business when running their affordability assessment.

They will also consider your borrowing history on an individual basis, and understand how your finances may have changed in more recent times, especially if you have taken steps to clean up your credit record.

Contractors with a Poor Credit Score Mortgage Information

The deposit amount is crucial

You should recognise the very real drawbacks you may face as a contractor applying for a mortgage with a bad credit score. Your status is likely to narrow the range of mortgage options available to you, and in particular will probably exclude those with a favourable interest rate, at least initially. Mortgages specifically designed for those with a poor credit history usually carry a higher interest rate, and are likely to also require you to put down a larger deposit. As well as lessening the lender’s exposure to risk, this will also perhaps balance the effect of the interest rate on your monthly repayments, depending on the duration of the loan.

Being able to provide a larger than usual deposit is one way contractors with a poor credit score  might access a better mortgage deal. The other is to talk to an experienced specialist mortgage broker, who will have access to the whole UK market as well as an intimate knowledge of how each lender works, and what criteria they use, instead of trying to approach lenders directly yourself. You’ll have a lot more options in front of you, and will be able to consider exclusive deals that specialist lenders will not advertise or make available to all-comers.

A broker with a lot of experience of handling these kinds of applications in the past will be able to comprehensively guide you through all the steps you need to take, and will have the insight to ensure your application is presented to the mortgage lender in a way that gives you the best possible chance of success.

What happens if I am Declined for a Contractor Mortgage?

Being declined for a contractor mortgage is not uncommon, and understandably might cause you some anxiety. However, the reason for being turned down could lie in the way your application and/or income is presented–a problem we often see in cases where borrowers have approached lenders directly. As specialist mortgage brokers, optimising your application so it presents your finances in the best light is part of what we do, and commonly leads to a mortgage being secured.

Why Does This Happen?

Mortgage lenders make their decisions regarding a home loan based on their assessment of your income and its sustainability. When contractors are declined for a mortgage, it’s usually down to a lack of understanding about how you are paid, and the regularity and longevity of your income.

Certainly, with mainstream lenders, it can often be the case that a contractor simply doesn’t fit into the narrow parameters that they set for mortgage applicants and their system is simply not geared to handle anything beyond a conventional employee. Some lenders might set requirements for documentation that are almost impossible to meet, so they will assume that you will not be able to afford a mortgage on their terms.

If this has happened to you, it’s important not to feel too discouraged. There is more than one type of lender in the mortgages market, and many others take a more flexible, enlightened view of how contractors get paid and their long-term prospects. If you take the right steps and approach the right people, you are likely to find the home loan you require.

What to do if you have been declined

If your application went wrong, then the first thing to do is to find out why. It’s worth asking specific questions to establish the shortcomings in your application as it stands. Then, you need to maintain honest, open communication with others in the property chain, to keep up goodwill and show your integrity. Explaining to your estate agent what has happened will relieve any tension that might exist between you in this situation, and they should be able to give you an indication of whether the vendor will be able to continue with you as the preferred buyer while you explore new avenues for a mortgage.

When the situation is clarified, then it’s probably time to talk over what you need with a specialist mortgage broker. Someone with specific experience and insight into the contractor mortgages market, and the way a contractor’s business and finances are structured, will be able to identify the right lenders to approach and ensure they understand what your work status means for your earnings before making the application. This will increase the chances of your application being accepted.

Unfair Perceptions

As you may know, many lenders, especially those on the high street, have an unfair perception of the level of risk posed in lending to a contractor. However, their loss is the specialist lenders gain as the number of people in this type of employment rises, and indeed contractors can end up having the upper hand when looking at deals on offer from niche-market lenders.

Some tips you should bear in mind when applying for a mortgage:

  • Know your minimum deposit
    The standard minimum deposit on a mortgage is 5%, but to access better interest rates and lower monthly repayments, it can be wise to consider finding a minimum deposit of 10–25%. Check the lie of the land with your mortgage advisor.
  • Update all the relevant paperwork
    Every document you present in support of your application needs to be current – this means an up-to-date signed copy of your contract to show your income, a refreshed CV to show your skills and work history and proof of ID that shows your current address.
  • Keep a contract history
    It’s not always necessary these days, but you may need to show your track record of contracting, and having it to hand will only support your case.
  • Keep your credit report as clean as possible
    Blemishes on your credit history can cause anything from hiccups to major issues in your application, depending on the severity of the bad credit event. Keep your credit record as clean as you can and take steps to strengthen it by paying any instalments on credit promptly, ensuring the details they have on your records are correct and up-to-date, and registering on the electoral roll at your current address.

If you have suffered from being declined for a mortgage, or want to talk over your options and what you can do to strengthen your application, please talk to one of our expert specialist advisors as soon as possible. Initial consultations are free, and carry no obligation.

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