The impact of employment status on mortgage approval is significant, as lenders use it to assess an applicant’s financial stability and ability to repay the loan. Here’s a breakdown of how different employment statuses can affect mortgage approval:
1. Permanent Employment
- Stability: Permanent employees generally have a stable income, which is favorable for mortgage approval. Lenders see this as a lower risk since the income is regular and predictable.
- Income Verification: Lenders will usually require recent pay slips, tax returns, and sometimes a reference from the employer to verify income.
- Loan Amount: A steady job with a stable income can lead to a higher loan amount because it demonstrates the ability to make consistent repayments.
2. Temporary or Contract Employment
- Income Variability: Contract workers and those with temporary employment may face challenges because their income can be less predictable. Lenders might view this as a higher risk.
- Proof of Income: Applicants may need to provide a longer history of contract work or temporary roles to prove their income stability. It might help to demonstrate a consistent track record of earning similar amounts.
- Loan Approval: Approval might be more difficult, and loan amounts could be lower compared to permanent employees, as lenders may require a higher level of financial security.
3. Self-Employment
- Income Proof: Self-employed individuals must show a stable income through business accounts, tax returns, and sometimes additional financial documentation. Lenders will often look for at least 2-3 years of financial records.
- Business Stability: The nature of the business and its stability can impact approval. A successful, long-running business might be viewed more favorably than a new venture.
- Higher Deposits: Self-employed applicants might need to provide a larger deposit or meet stricter lending criteria due to perceived higher risk.
4. Unemployed or Non-Employed
- Approval Challenges: Those who are unemployed or not currently earning income typically find it difficult to get a mortgage approval, as lenders require evidence of the ability to make repayments.
- Alternative Proofs: In some cases, alternative proofs of income, such as savings or investment returns, might be considered, but it’s generally more challenging to secure a mortgage under these conditions.
5. Retired
- Pension Income: Retired individuals can use pension income as proof for mortgage applications. Lenders will assess the sustainability and adequacy of the pension income.
- Loan Terms: Mortgage options may vary, and some lenders may offer specialist products designed for retirees. The maximum age for mortgage repayment might also be considered.
Tips for Improving Mortgage Approval Chances
- Maintain a Stable Employment History: Stability in employment or self-employment history can positively impact mortgage approval chances.
- Build a Strong Credit History: Regardless of employment status, a good credit score can improve the likelihood of getting approved.
- Save for a Larger Deposit: A larger deposit can mitigate some risks associated with less stable income sources and improve approval chances.
Understanding how employment status affects mortgage approval can help applicants prepare better and navigate the mortgage process more effectively.