Contractor Mortgage Bad Credit
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Home » Specialist Mortgages » Contractor Mortgages Made Simple » Contractor Mortgage Bad Credit
Contractor Mortgage Bad Credit
Adam Messer is back to explain how the mortgage process works if you are a contractor with bad credit.
Can I get a mortgage with bad credit as a contractor?
All of this will depend on how bad the credit is and how old it is. County Court Judgements (CCJs), defaults, an Individual Voluntary Arrangement (IVA)… things get progressively worse as you go through that list.
But you can definitely get a mortgage as a contractor – or otherwise – with some elements of bad credit.
The worse it is, the more specialist the type of lender we have to go to, the higher the rate might be and the more deposit you might need to have. We will probably talk more about those things in a minute.
There’s nothing stopping you getting a mortgage with a bad credit. You might just not be able to walk into Santander and get a market leading rate. That’s all.
Do I need a larger deposit for a mortgage with bad credit as a contractor?
It depends. There are certainly lenders we can go to with a 10% deposit. It’s just that those lenders are a little bit more specialist and have higher rates accordingly.
The more deposit you’ve got, the lower your rate is going to be and the more mainstream your lender will be. If your credit history is quite bad, you may find yourself needing more deposit. We do have cases where people have the odd credit blip – such as a missing or late payment within the last couple of years on unsecured debts.
We might try with a lender with a 10% deposit and they say no, but that same lender might accept a 15% deposit. It just depends how their system scores you. We could also go to a different lender that’s more specialist, and they would do it with a 10% deposit.
It very much depends what the credit situation is and how bad it is, but yes, potentially you might need a larger deposit.
What if I’m a First Time Buyer contractor and have bad credit? Will this affect me getting a mortgage?
It doesn’t really matter whether you’re a First Time Buyer or otherwise. Credit is looked at in the same way. As a First Time Buyer, you don’t have that track record of paying a mortgage. You might have bad credit from unsecured commitments.
Unsecured means things like loans and credit cards that aren’t secured on a property. Mortgages are secured on property and lenders take a dim view if you miss payments on secured debt. If you’re going to miss any payments, it’s best to do that on something unsecured.
As a First Time Buyer, it is going to have an effect – there’s no getting away from that. But the size of that effect will depend on how bad and how recent the credit issues were.
Remember that bad credit only stays on your file for six years. If you have a default, for example, it disappears from your credit file and is forgotten about.
Are there many bad credit remortgage lenders for contractors?
Yes, but this is an interesting point. It depends what you need to do with your remortgage. Do you need to borrow more money or make any changes? If not, you don’t need to swap lenders.
It depends on your situation. Let’s assume for a moment that you’ve got a mainstream lender like NatWest. You took a mortgage out a few years ago but you’ve had some credit issues since. To another lender, you’re not going to look so good. We’ll end up going to a specialist lender – but, you could just stay with NatWest and just choose a new product. We can help people do that.
That’s an option, because your current lender won’t ask any questions. As long as your mortgage is up to date, they don’t look into your credit score, affordability or anything like that. So it’s a good backup option to have.
If you’re already with a lender that’s a bit more specialist and your credit is still bad, we’ll have to weigh up whether it’s best to stay with the same lender and choose a new deal, or get a slightly better deal elsewhere.
There’s nothing stopping you getting a remortgage. We just need to decide if that’s the best thing or if you should just stay where you are.
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Can I be declined a remortgage as a contractor? How do I remortgage as a contractor with bad credit?
Yes, it can be declined, but it’s quite rare to be declined on credit once you’ve already got an Agreement in Principle. We would tend to know fairly soon if you would be declined on credit. We would go to a lender and do an Agreement in Principle – as that’s the first part of the application.
At that point, they download your credit file. They then decide whether to help you with a mortgage or not. If the computer says your credit score is fine for a mortgage, that won’t be why you’re later declined.
You could be declined for other reasons – affordability and income, for example, but not credit score once it’s already been accepted.
Some specialist lenders take a more manual approach, and they won’t do a credit score in the first place. They’ll let a person look at it and decide whether to accept you. In any case, if you are declined, there’s almost always another option.
Can I get a Buy to Let mortgage as a contractor with bad credit?
Buy to Let mortgages are less focused on your income. Lenders will still want to know what your income is, but it’s less about what you earn and more about making sure the rent will cover the mortgage.
They do have to be sure you’re going to use that rent to cover the mortgage, and that’s where bad credit problems come in. Lenders still need to approve you, but again, there are more specialist lenders we can go to on a Buy to Let, so bad credit isn’t the end of the world.
We just might have to pay a bit more.
Can you consolidate debt twice as a contractor?
Ultimately, you can do what you like. It’s your money. But we really wouldn’t recommend that people consolidate debt twice, although it does depend on what the debt is for. Contractor aside, you can consolidate debt as a contractor or anyone else.
We’ve got a section on debt consolidation, so if you need to know more about that, go and check that out.
But let’s say you’ve bought a property that’s a doer-upper. You’ve spent money on it on credit cards and loans and then, at remortgage time, we put that debt onto the mortgage.
It’s home improvement debt. There’s nothing wrong with that. Let’s say for the next couple of years you carry on working on the house and you’ve accumulated more debt and you consolidate again. That’s fine – I don’t think there’s an issue with consolidation for home improvement debt.
What we would have an issue with is debt accumulated on three holidays and a new car, that you now want to pay off. We get you back on the straight and narrow, but then three years later you’re in the same situation and want to consolidate again.
The responsible advice there is that you can’t keep doing this. Your mortgage would be going up, not down. We have to be very careful around debt consolidation, but it does depend on the backstory.
Can I use a guarantor for a mortgage as a contractor with bad credit?
Guarantor mortgages rarely work, because your guarantor needs to be able to afford your whole mortgage alongside their other existing commitments. Normally a guarantor is a parent, but perhaps your parent is in their mid 50s and you’re 30. You can have a 35 year mortgage, but your parent can’t.
So we end up trying to fit a mortgage within the term that suits your parents, which might just be 10 years. That makes the monthly payments unaffordably high.
So guarantor mortgages are rarely achievable. Other lenders do something similar to a guarantor arrangement, but it’s slightly different, and sometimes this can work.
Bad credit doesn’t necessarily stop you having a guarantor mortgage, but the guarantor element is challenging. There are other arrangements that might work, but sometimes those are unsuitable in an adverse credit situation.
How do I improve my credit score before remortgaging as a contractor?
Whether you’re remortgaging or taking out a mortgage for the first time, it doesn’t really matter. There are a few things you can do to improve your score.
You can’t get rid of your adverse credit until it’s six years old, but you can make sure that everything since then is as good as possible. It’s actually good to have a little bit of debt – even if you have to take the worst credit card in the world with a million percent interest. If you buy something on it and then pay it off, you’re not going to pay any interest on that.
It just shows that you can manage your money now, although it’s going to take six months to have a meaningful impact. Get a credit card and pay it off every month on a direct debit so that, heaven forbid, you don’t miss another payment.
Make sure everything’s up to date and you’re on the electoral roll. Keep everything as clean and tidy as possible. If you’ve got credit cards, try and reduce the balance on them across the board.
If you’ve got a credit card with a £1000 limit but you’ve spent £999 on it, that doesn’t look good. You’re maximising your available credit. But if you’ve got two credit cards that both have a £1,000 limit and you’ve spent £500 pounds on each, you’re only using 50% of your available credit. That looks much better.
Tweaks like that will help improve your score a little bit. But I’m afraid there’s no magic bullet to get rid of your adverse credit any sooner than it would naturally disappear.
How do I apply for a mortgage with bad credit as a contractor?
Come and speak to a mortgage broker and we’ll tell you what you need. We do your mortgage application, and we’re going to need some income evidence. It depends whether you’re a CIS contractor or if you’re self-employed, as that affects how we’re looking at your income. It also influences which lenders we go to.
We might want your SA302s, your tax calculations or CIS payslips. It depends what sort of contractor you are. You might be a full-time contractor in which case we might want your contract, as well. There are different ways of looking at a contractor’s income. Once we’ve spoken to you, we’ll tell you what documents we need. Then we can do the application for you and manage it all through.
If you have any questions, please do get in touch. When it comes to this more specialist stuff, it’s all individual to your circumstances, so talk to us about your options.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.
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