Contractor Mortgages with a Gap in Employment

As a contractor applying for a mortgage, you’re likely to ask how does a gap in employment affect your contractor mortgage application?

Being a contractor means having periods of lucrative engagement and the flexibility to take as much time out as you like when a contract ends. Some might say that’s like having your cake and eating it.

However, it may not taste so sweet when it comes to applying for a contractor mortgage.  Lenders won’t be too eager to take you on if you have long gaps between contracts.

When a mortgage lender looks at an application from a contractor, they hope to find a timeline of regular, fixed-term contracts of at least 12 months. They also want to see a good credit score, healthy deposit and well-managed expenditure.

That’s because they need to be sure you can repay the loan and not get into financial difficulty if your contracting work dries up.

Likewise, as a contractor, you can earn substantial sums of money in a short period of time.  This means you can easily save a large deposit or spread your income to see you through long periods without work.

If this is your situation, it’s important to make that clear to the lender from the outset.

What’s the best way to apply for a mortgage with gaps in my contracts?

If your contracting work has been inconsistent and you have a gap in employment, it’s worth engaging a Mortgage Adviser to help you secure a mortgage.

Specialist lenders that accept mortgage applications from self-employed contractors prefer to receive them via Mortgage Broker introduction. Using a Mortgage Broker to help you buy a home will double your chances of receiving a mortgage offer.

However, make sure you choose one that’s registered in England and Wales and is authorised and regulated by the Financial Conduct Authority (FCA).

How big a gap is acceptable when applying for a mortgage?

What may seem an acceptable gap to you, may appear worrying to a lender. However, a six-week pause between contracts is usually acceptable.

This is a reasonable period to enjoy summer school holidays off with the children or take an extended break to go travelling when circumstances permit. Most lenders will see six weeks as being perfectly acceptable and aren’t likely to question your reasons.

However, if you’ve taken regular breaks for longer than six weeks, a lender will question whether you’ll have enough funds available to sustain your mortgage repayments now and in the future.

Will a lender consider gaps between contracts in exceptional circumstances?

There are times in everyone’s lives when we need to take time out of our work schedule for a valid reason and lenders will accept this. For example, you may need up to three months of parental leave if you have a new arrival.

Alternatively, you may want to attend a college or university course for further education or need medical treatment that requires a long period of recuperation. It’s important to explain longer gaps to your Mortgage Broker, so they can relay this to a potential lender.

What’s the best way to prove my income if I have gaps between contracts?

It’s best to have a year’s worth of continuous employment and six months of a current contract remaining at the point of applying for a mortgage.

If there are gaps in your contracting history, a specialist underwriter may be assigned to your application to establish your income and affordability. It’s likely they will ask in-depth questions about your income, expenditure, reasons for gaps and your contract pipeline.

If you’re a new contractor and First Time Buyer, you may be able to use your employed history to demonstrate experience and expertise in your profession.

Most contractors use a day rate to calculate annual income, however, this may not be the best route if you have long gaps between contracts.

Can I use my annual accounts instead?

Yes, you can use your annual accounts to prove your annual income instead. What you will need depends on whether you’re set up as a limited company, or sole trader.

What documents do I need to prove my income?

Contracting through a limited company

If you’re the director of your company, you pay yourself a salary and dividends. Ask your accountant to compile these documents for you:

• The last two years of company accounts (drawn up by a chartered accountant)
• Director salary payslips to show your basic PAYE income
• Dividend vouchers to prove how much profit you’ve drawn from the company
• Self-assessment forms SA100 and SA302 to show your tax calculations if you receive other self-employed income, such as rent from a Buy to Let property
• An accountant’s certificate

You’ll also need your last three months of business and personal bank statements, a credit report and proof of ID.

Contracting as a Sole Trader

If you’re registered with HMRC as a Sole Trader, you’ll need:

• Two years’ worth of self-assessment accounts prepared by a qualified accountant
• Self-assessment SA302 forms as proof of income and tax paid
• Three months’ worth of business and personal bank statements
• A credit report and proof of ID

How does a gap in contracts affect my contractor Buy to Let mortgage application?

A Buy to Let mortgage application will be based on how much rent your property will achieve on the rental market. However, your lender will need to ascertain whether you can afford the repayments on your mortgage if the property is empty or tenants fall into rental arrears.

They will want to make sure you’re not overburdening your borrowing commitments, so will expect to see proof of income, contracting history, credit rating, bank statements and identity documents.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.