Contractors enjoy a certain level of freedom and flexibility that comes with being one’s own boss. But as inviting as that may sound, being a contractor does have some drawbacks as well.
Buying a house is one of them. It can be terribly challenging for contractors to prove income sufficient for a mortgage, especially in light of the banking reforms put in place following the housing crisis of the previous decade.
The good news is that contractor mortgages are out there. Offered mainly through third-party lenders and mortgage brokers, these mortgages are tailor-made for contractors whose income may not be consistent every single week. There are ways to prove income sufficiently enough to determine a contractor is a good credit risk.
Here are five things to know about contractor mortgages:
1. How Lenders Assess Contractor Income
A contractor doesn’t necessarily get paid every week. In fact, there is no consistent pay schedule for some types of contractors. They get paid when jobs are completed. And because jobs can take differing lengths of time depending on their complexity, pay can be sporadic.
Lenders understand this, which is why the general rule of thumb is to average income over several years. Assume a contractor who makes £45,000 in one year, £55,000 the following year, and £50,000 in his third year. Averaging those three years together would produce an income of £50,000 annually.
This general rule of thumb works as long as income swings between years is not significant. If a lender is looking at average income swings of 30% or higher, there may be a problem.
2. The Day Rate Assessment
Some contractors are fortunate enough to work in an industry in which extended contracts offer day rates. Think of an IT contractor as an example. That contractor may sign a 12-month contract for which he gets paid a flat rate every single day. This sort of arrangement gives him a bit more financial consistency that plays well for mortgage lending.
Lenders willing to accept day rate assessments simply multiply the contractor’s day rate by the number of days typically worked in the year. The resulting number is the estimated income that contractor will earn moving forward. This sort of assessment is ideal for contractors just getting started. But it requires having an ironclad contract signed and in place.
3. How Income is Verified
Regardless of how income is assessed, it is still up to the contractor to provide enough documentation to prove income. One of the best tools for doing this is the self assessment tax return. Such a return is considered fairly ironclad proof of income. However, the contractor doesn’t need to stop there.
Contractors can furnish copies of invoices, an annual balance sheet, bank account records, and anything else that might prove income. It is hard to imagine a lender would turn down any verifiable document as proof.
4. Private Lenders Are More Flexible
Contractors may have a difficult time finding a mortgage if they only apply with banks and building societies. Often times, these sorts of institutionalised lenders are limited in what they can offer. They do not want to take any unnecessary risks that might jeopardise deposits. Private lenders not relying on deposits are in a better position to help contractors. They tend to be much more flexible.
A private lender is financed by the financial resources of its owners. Unlike a bank that relies on customer deposits to fund mortgages, private lenders are self-funding, so it is easier for them to lend to non-traditional borrowers.
5. Best Obtained from Mortgage Brokers
Contractors in need of mortgages should know that these are best obtained through mortgage brokers. A mortgage broker has access to mortgage deals contractors will never find at a bank. Some of their deals are made available exclusively to brokers, and some of those deals are tailor-made for contractors.
Contractors may have a more difficult time finding mortgages, but those mortgages are out there. It is a matter of knowing where to look and what to look for. If you are a contractor, do not stress about buying a house. Contact a mortgage broker and find out what is available to you.