Can contractors with bad credit get a mortgage?

Securing a mortgage as a contractor with adverse credit is certainly challenging, but it is not impossible. While high street banks often use rigid automated systems that may reject applications based on either contracting status or past credit issues, specialist lenders and brokers assess applications manually. Your success will depend primarily on the severity and age of the credit problems, the size of your deposit, and the stability of your current contract history.

Can Contractors with Bad Credit Get a Mortgage? Understanding Your Options

Contracting provides flexibility and often high earning potential, but it can create hurdles when seeking mortgage approval. Lenders typically prefer the straightforward income structure of permanent employment. Adding complications like a history of adverse credit—such as missed payments, Defaults, or County Court Judgments (CCJs)—requires a strategic approach focused on specialist lending options.

The good news is that the mortgage market has evolved significantly. Lenders are increasingly aware of the value and stability offered by experienced contractors, even those who have faced financial difficulties in the past. If you are a contractor looking for property finance, your application will generally face two distinct challenges simultaneously: income assessment and credit history.

The Dual Challenge: Contracting Status and Adverse Credit

When assessing an application from a contractor with adverse credit, lenders need reassurance on two fundamental points: affordability (can you afford the repayments?) and reliability (will you commit to the repayments?).

1. Contractor Income Assessment

Mainstream lenders often struggle to accurately assess a contractor’s income. If you operate through your own Limited Company, a high street bank might assess you solely based on your salary and declared dividends, which you might keep low for tax efficiency. This can drastically underestimate your true borrowing power.

Specialist lenders, however, are far more accommodating. They typically use your day rate as the primary measure of income:

• They calculate your expected annual income by multiplying your day rate by a standard number of working days per year (often 220–240 days).
• They focus on your current contract and your contract history (typically requiring a minimum of 12 or 24 months of consistent work).

The key here is proving stability. Lenders want to see evidence that your contract income is reliable and likely to continue.

2. Assessing Adverse Credit

“Bad credit” is a broad term. Lenders look into the specifics of your credit history to determine the level of risk. They assess three main factors:

• Severity: Is it a minor missed payment on a phone bill, or is it a recent CCJ or bankruptcy? Severe issues pose a much greater hurdle.
• Age: How long ago did the issue occur? A Default registered five years ago is viewed far more favourably than one registered six months ago. The older the issue, the less impact it usually has.
• Reason: Was the credit issue caused by a sudden, non-recurring life event (e.g., divorce or illness), or does it show a consistent pattern of poor financial management? Lenders are generally more flexible if you can demonstrate mitigating circumstances.

Strategies for Mortgage Approval with Bad Credit

If you are a contractor with a history of adverse credit, certain strategies can significantly improve your chances of approval and help you access competitive rates, albeit usually higher than those available to applicants with perfect credit scores.

Focus on Specialist and Subprime Lenders

Specialist lenders are often the only realistic option for contractors with significant adverse credit. These lenders manually underwrite applications and are prepared to take on higher risk in exchange for a higher interest rate and a larger deposit. They understand that a contractor’s high earning potential can often offset past financial mistakes.

Working with an experienced mortgage broker who specialises in both contractor mortgages and adverse credit history is crucial. They know exactly which lenders are most sympathetic to your specific circumstances and how to present your application effectively.

Increase Your Deposit Size

The size of your deposit, known as the Loan-to-Value (LTV) ratio, is arguably the most important factor when applying with adverse credit. A larger deposit reduces the risk for the lender. While a typical applicant might secure a mortgage with a 10% deposit (90% LTV), a contractor with recent adverse credit may need 15%, 20%, or even 25% (85% to 75% LTV).

The more equity you invest upfront, the more flexible lenders are likely to be regarding your credit history.

Improve Your Credit Profile

Taking proactive steps to clean up and enhance your credit file should be a priority before applying for a mortgage. This includes:

• Ensuring you are registered on the Electoral Register at your current address.
• Paying down existing debts, especially credit cards, to lower your credit utilisation.
• Checking your credit report for errors and getting them corrected.

Knowing exactly what your credit file contains is essential preparation for any mortgage application. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

For further general guidance on how lenders use credit scores, you may find the information provided by organisations like MoneyHelper useful.

Presenting a Strong Application

Contractors with bad credit need to provide extensive documentation to compensate for the higher perceived risk. Be prepared to show:

• Contract Evidence: Copies of your current and previous contracts, demonstrating contract duration, day rates, and renewal history.
• Bank Statements: Typically, six months of personal and business bank statements proving consistent income flow and responsible financial management since the credit issues occurred.
• Evidence of Settled Debt: Documentation proving that any past Defaults or CCJs have been fully satisfied.
• Explanation of Credit Issues: A formal, written explanation detailing the circumstances surrounding the adverse credit events, focusing on how you have remedied the situation and what steps you have taken to prevent recurrence.

The goal is to demonstrate that the adverse credit event was a past issue and that your current financial habits and contractual income are stable enough to service the debt reliably.

The Cost and Risk Implications

It is important to be realistic about the financial implications of securing a contractor mortgage with adverse credit. You will likely face:

• Higher Interest Rates: Lenders typically charge a premium interest rate to compensate for the elevated risk profile.
• Higher Fees: Specialist mortgages often come with higher arrangement fees or broker fees.

If you choose to use a bridging loan to secure a property quickly, perhaps if you are purchasing a property at auction, you must be aware of the inherent risks. Bridging loans are high-interest, short-term finance solutions. Your property may be at risk if repayments are not made. Consequences of missed payments can include legal action, repossession, increased interest rates, and additional charges.

For standard residential mortgages, maintaining repayments is vital. Defaulting on your mortgage could lead to repossession of your home and severely damage your credit rating for many years.

People also asked

How soon after a CCJ can a contractor apply for a mortgage?

Lenders generally prefer CCJs to be registered and satisfied (paid off) for at least two to three years. However, specialist lenders might consider applications sooner, particularly if the CCJ was minor and settled quickly, though this will usually require a significant deposit (25% or more).

Do specialist lenders assess limited company contractors based on salary and dividends?

No, one of the main advantages of specialist lenders is that they typically assess limited company contractors based on their day rate and the length of their contract history, rather than relying on the figures declared for tax purposes (salary and dividends).

Can I get a mortgage with a history of bankruptcy?

It is highly challenging but possible. Most lenders require at least five to six years to have passed since discharge from bankruptcy. You will need a large deposit (often 30%+) and a clear credit history since the discharge date to stand a chance of approval with a specialist provider.

Does having long-term contracts make a bad credit application easier?

Yes. Contract stability is a massive mitigating factor. If you can demonstrate a long history (e.g., three years or more) of renewing contracts successfully with high day rates, lenders gain confidence in your future affordability, which helps outweigh the risk posed by past credit issues.

Is it harder for contractors to get Buy-to-Let mortgages with bad credit?

Buy-to-Let (BTL) applications are often assessed primarily on the rental income potential of the property, not solely on the applicant’s personal income. However, bad credit will still limit your access to mainstream BTL products, forcing you towards specialist BTL lenders who charge higher rates.

In conclusion, while being a contractor with bad credit places you outside the parameters of standard high street lending, the opportunity to secure a mortgage remains firmly open through expert advice and specialist lenders. By maximising your deposit and thoroughly preparing your application, you can navigate these challenges successfully.