How Bad Credit History
affects Contractor Mortgages?

Can a contractor get a mortgage with a poor credit score? 

The gig economy in the UK accounts for 4.7 million workers. The UK gig economy has more than doubled in size over the past three years. 

There is no doubt that this change in the workforce has changed the demand in the UK mortgage market. The lenders are developing policies and products suited for contractors, self-employed people, and mortgage applicants with poor credit scores.

What is a poor credit score?

 A poor credit score is likely where you have a:

  • Unsatisfied CCJs (generally a CCJ appears on the file for 06 years from the judgment)
  • Credit cards in arrears
  • Defaults in utility payments
  • Missed mortgage or rental payments

A further credit check by a lender can be detrimental if you have a poor credit score.

Will a lender ignore a bad credit score for a contractor and offer a mortgage? 

No, not with most lenders. However, some do. 

Unfortunately, most high street lenders and building societies are not ideal for a person with a bad credit score. Most top tier lenders design their policies, affordability calculators and assessment methods on disposable income, and the client’s credit history. They are likely to reject an application for a contractor with a poor credit score.

However, there are specialist lenders who can consider applicants with imperfect credit profiles. A handful of mortgage providers do not credit score. 

There are also lenders in the market who consider a mortgage with bad credit history. This may be a subprime mortgage loan. This means a lender offers a higher rate for individuals who do not qualify for prime-rate loans. 

Will a contractor be able to apply for an impaired credit mortgage?  

Yes, they can. Most contractors apply for a mortgage using their day or hourly rate. A very few adverse credit lenders may consider your contractor day rate.

Most will look at dividend and salary figures, or the retained profits in the business when assessing the affordability. 

Apart from that, these specialist lenders will assess your financial track record over the past few years, how you have dealt with your credit, and the steps you took to clean the poor credit score.

The deposit amount is still crucial.

Lenders will consider applications with a 15% deposit or in other words 85% LTV. 

Please note, your income status and the credit score will narrow your options to a limited number of lenders. You may not be able to go with attractive interest rates the high street lenders offer. Also, the product fee may be higher. 

It is always better if you can make a larger deposit as this will reduce the lender’s risk and give them the confidence to lend to you. 

How to check your Credit Score? 

It is always better if you can check your credit profile. Check my file, Experian and Equifax are popular credit reference agencies who can credit score you. Credit reference agencies try to show your profile the way the lenders see you. 

Check my file provides a consolidated view of your credit report. It gives the users a detailed report that consists of credit rating reports from Experian, Equifax, and Call Credit. Most mortgage lenders use these credit ratings from one or more of these agencies for their searches too. 

Most credit reference agencies provide users a month’s free trial, and the user can cancel the membership within one month.

How to improve my credit score?

The following can help you improve your score:

  • Pay your bills on time by direct debit. Mortgage Lenders like to see you settle your commitments on time
  • Don’t rack up debt
  • Don’t exhaust your credit limit on credit cards
  • Register yourself on the electoral register with the correct address
  • Close the credit cards you no longer use
  • Unnecessary credit searches will weaken your credit score. Always try to avoid if the search is unnecessary

You find a cheap deal online. Is it the right deal for you?

If you are an IT contractor with a 12 month trading history, a product from a bank like Barclays or HSBC may not be suitable for you. If you have a poor credit history, most of the high street lenders are likely to decline your application. Therefore, you may need a contractor mortgage specialist to help. 

How to understand my credit file? 

It is essential to understand your credit file and how it works. A mortgage broker can help here. A mortgage broker easily picks up details such as credit card providers, outstanding balances, personal loans, and hire purchases. 

If a contract worker has adverse credit, a mortgage adviser can help you understand if this is likely to affect your mortgage application. 

If you are a first time buyer or new contractor, you may need handholding on how to review your credit file. 

Overall, credit score and credit history are essential for the success of a mortgage application. If a contractor is settling all the monthly credit card outstanding balances in full and maintain a good credit history, they have a good chance of applying for a mortgage with decent interest rates. When a contractor is having few anomalies in the credit file, they should go to an experienced mortgage broker to find a suitable lender with fewer credit restrictions. 

Recent missed payments

Lenders don’t like recently missed payments. The older the missed payments, your chance of getting a mortgage is higher. However, there are a few lenders who would consider mortgage applications with recently missed monthly payments. 

The higher the number of recently missed payments, the slimmer the chance of approval. 

Can an Umbrella Company or a PAYE contractor apply for an impaired credit mortgage?

Yes. 

Not all banks offer deals for inside IR35 contractors an impaired credit mortgage. However, some lenders would consider IR35 contractors working via their own limited company, an umbrella company, or a fixed-term contract and may provide adverse credit mortgages.

Contract workers have been working in the public sector since April 2017. Therefore, banks are familiar with contractors such as locum doctors, dentists, IT contractors, and professionals working under these structures. Therefore, specialist lenders will be ready to handle the private sector role out in 2021. 

Selecting the most suitable lender and the right broker will make the difference. 

It is always good to seek the assistance of a mortgage broker. Brokers help you by assessing your circumstances and by recommending you the most suitable lender and mortgage option.

Impaired credit mortgages for contractors may require a mortgage specialist as selecting the right lender will make the difference. If not, you may end up running a few applications that may affect your credit score further.

The advisers consider your priorities and circumstances, Discuss the complications with the Business Development managers of the lenders when and where it is required. A whole of the market mortgage broker is likely to secure the most suitable deal for your mortgage.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage payments.