1. Always use a contracting mortgage broker
Many contractors are convinced that they can obtain a mortgage on their own without the help of a mortgage specialist. This attitude quickly changes after they have approached several banks only to be turned down. The problem lies with many employees of local bank branches or call centers. There’s nothing worse than a young graduate telling you, quoting her standard script, that he can’t get a mortgage because he doesn’t have enough income to support the home loan he’s applying for. Or a Delhi based call center that just doesn’t understand your job situation as a contractor. Unfortunately, they are not trained to understand the contracting environment you work in, let alone the business structures and payment mechanisms that contractors use. So if you’re fed up with being asked questions that have no relevance to your employment status such as employer details, evidence of time spent, pay stubs, etc., our recommendation is that you hire an experienced mortgage contractor. in arranging contractor mortgages.
2. Secure a mortgage based on your contract rate
If you’re lucky enough to find a lender who doesn’t flinch after you tell you they’re a contractor, they’ll want to assess your affordability using their self-employed criteria for limited partnership directors. This means they will want to evaluate your home loan based on a limited measure of your principal’s compensation, which may not fully reflect the total earnings available to you. They will need to see the three-year accounts, which exclude contractors who have not been working long enough to produce audited three-year accounts. For those contractors who can provide three-year accounts, they will be assessed on the physical drawings they are taking of their limited partnership, without regard to retained earnings.
Most contractors who operate through their own limited liability company do not earn all of their annualized income in salary withdrawals and dividends. For tax purposes it makes no sense, instead most contractors that operate in a tax efficient manner charge a minimum wage and also restrict dividend withdrawals to avoid a higher tax rate. While this makes a lot of sense from a tax planning perspective, it has the unintended effect of reducing the amount contractors can borrow based on the standard criteria used by most lenders.
Contractor Mortgage Specialists have worked hard over the past 10 years to develop strong relationships with major banks in connection with simplifying what qualifies as relevant earnings for contractor loan purposes. They have influenced the change in the underwriting criteria for contractors.
There are now a number of high street lenders that will provide contractor mortgages based on gross contract proceeds. The home loan can be as much as 4-5 times your annualized contract earnings. This means that you don’t have to rely on the traditional method of using accounts.
To calculate how much you can potentially borrow based on the contractor-based underwriting, you need to multiply your daily contract rate by the number of days you work in a week followed by 48 weeks. In most cases, you can get a mortgage of up to 4 times this number. For example, a contractor with a daily rate of 500 can potentially borrow:
500/day x 5 days x 48 weeks then multiply the product by 4 = 480,000
The following documentation is required to package a contractor mortgage application:
1. Your current contract indicating your daily/hourly rate of pay
2. CV describing your skills and experience
3. Completed “Fact Find” questionnaire (required for all regulated mortgages)
3. Maintain a good credit score
Many contractors don’t realize the importance of maintaining a good credit score. This score can be the difference between the lender accepting your application or rejecting it.
The first step in the mortgage process is to obtain an “agreement in principle.” This involves the lender running a credit search on you to determine your credit score.
Regardless of whether you can put down a large deposit or even a large income, lenders will reject your mortgage application if your score is low. Today’s economic customer has forced lenders to adjust their criteria and choose applicants with good credit scores.
So make sure you maintain a clean credit history to avoid giving the lender an excuse to say NO.
You can ensure that your credit rating is good by taking the following steps:
• Make sure you are registered in the electoral register of your town hall
• Do not request a lot of credit in a short time, for example, mobile phone contracts and credit cards. This will leave a mark on your credit history.
• Cancel any unused credit cards and try to pay off any existing debt.
• Paying your bills on time is critical since lenders hate late payments.
• If you don’t already have credit, get one. Banks need to see that you have a history of successfully managing credit, staying within your credit limit, and making payments on time.