Since the onset of the credit drought in 2008, options such as ‘self-certified’ loans, where evidence of income is not required, are no longer available in the current marketplace. This has done little to help matters, and any contractor who has attempted to secure funding in recent times is likely to describe the experience as less of a ‘walk in the park’ and more of a ‘hike up a steep, high mountain with no end in sight.’
This unsavoury experience often begins when a contractor approaches a lender directly to secure funding. Despite contracting becoming an increasingly popular method of working across numerous sectors, many banks and building societies still have misconceptions surrounding the true earning potential of a contractor, and therefore incorrectly deem these borrowers to be a high risk. The credit crisis has prompted many mortgage lenders to try and push contractors into a streamlined ‘self-employed’ underwriting process, whereby income is assessed based on salary and dividend draw alone, and a large portion of contract earnings are ignored.
For limited company contractors, this poses a ‘catch-22’ situation. For tax efficiency purposes, the contractor may have been advised by their accountant to keep salary and dividend draw to a minimum. However, the lenders work on the same salary and dividend draw when defining earnings for mortgage purposes. With the lender often overlooking full gross contract value, an adverse lending decision is a common outcome of many contractor mortgage applications, which is both frustrating and disheartening for the contractor.
Specialist mortgage brokerage Contractor Mortgages Made Easy (CMME) noticed that the lenders were treating contractors unfairly, and spent considerable time educating the people who are responsible for assessing risk for the lender, known as underwriters, in order to improve the situation. In a bid to help the underwriters to understand the reasons for an individual to leave permanent employment to become a contractor, it was explained that those with the ability to secure a contract role in professions where contracting is popular (such as IT consulting, management consultants, and interim executives, for example) are in high demand due to the advanced range of skills that they possess. This means that contract workers are unlikely to struggle to secure work within their chosen sector, and are therefore a low risk in terms of income longevity.
Once the underwriters had grasped a realistic understanding of the low risk involved in lending to a contractor, CMME were able to effectively pioneer a more flexible and contractor friendly approach to mortgage underwriting with a wide panel of banks and building societies, known as ‘bespoke underwriting’.
The Bespoke Underwriting process seeks to ensure that contractors are not discriminated against due to a lack of understanding surrounding true contract earnings. With access to this process, a CMME mortgage consultant can engage directly with key decision makers within the banks following a fact-finding exercise with the contractor, which relates to their individual situation and mortgage requirements. With a copy of the contractors CV and contract confirming gross contract rate, the consultant can prove to the underwriters that gross earnings are sufficient enough to support the proposed debt. The contractor’s CV, which demonstrates their skills and career history, also confirms to the underwriter that the contractor is likely to able to secure future work with no sufficient gaps in contract.
The bespoke underwriting process is designed to help underwriters to recognise the full earning potential and longevity of income for the contractor. Through bespoke underwriting, the underwriter is able to adopt a straightforward process of taking the contractor’s daily rate and annualising it in order to assess income for mortgage purposes. This means that full gross contract earnings are taken into account, without the need for complex tax documentation and limited company trading accounts.
“Contractor Friendly” mortgage lenders have come and gone over the past nine years, to be replaced by many banks and building societies who have discovered an appetite for lending to professional contractors at a relatively low risk. CMME continues to work with key decision makers at the banks and building societies on behalf of contractors who wish to obtain mortgage funding based on their full gross contract earnings, at the same competitive ‘high street’ rates offered to permanently employed workers. As CMME continue to educate the lenders, the mortgage options and availability for contractors are continuing to grow as more and more banks and building societies are opening their criteria to contract workers, which is great news for any contract professional looking to secure a mortgage.
For further information about obtaining a mortgage as a contractor, please contact CMME on 01489 555 080, or click here to visit their website.