What on Earth is Contract-Based Mortgage Underwriting?
Last Updated: 21-09-2021
Reading Time: 9 minutes
Contract-based underwriting is a method some lenders use to assess a contractor's mortgage 'affordability'. If you're an umbrella or limited company contractor, it's the safest way to fund your mortgage loan.
But here's the thing. Not all lenders use this type of underwriting to work out how much a contractor
can borrow. Even fewer in branch or via call centres.
Many lenders, especially those on the High Street, demand at least 2–3 years' accounts. That's even if you, as a bona fide contractor, operate through your own limited company.
So, how can you make sure a lender sees what you can really afford? That's what we're looking at today.
Helping mortgage providers understand professional contractors' income
We're working with lenders to change this outdated insistence on using accounts. We've enjoyed cons
iderable success and now deal with more contractor-friendly lenders than ever.
But some lenders' affordability criteria is so inflexible they can't incorporate contract-based underwriting. And it's proving a stumbling block for many limited company owners.
Does this scenario sound oh, so familiar? Then you need to find a mortgage provider who'll lend based on your gross contract income.
The big questions now are: "Where and How?"!
Well, you'd do worse than starting here »
What's the difference between contractor and normal mortgages?
With regards to the mortgage products themselves, there's no difference. Those available to Joe Public are accessible to contractors, too. Interest rates, monthly mortgage payment and size of deposit required should also be similar.
The real difference lies in a contractor's perceived affordability. In other words, how lenders arrive at the amount they're prepared to lend.
Underwriting also works in a different manner for contractors. An in-branch adviser can often gather enough information for 'permies' to process their applications. As a contractor, the same doesn't hold true.
Only underwriters who understand the way limited company contractors work deal with such applications. In this sense, contract-based underwriting remains a specialised process. That's true whether you find the elusive contractor-friendly lender or not.
Here's the difference. Unlike in-branch advisers, underwriters have the power to grant or reject non-standard mortgage applications.
The problem contractors thus face is twofold; they must:
- identify which lenders have contractor-friendly underwriters (almost impossible, as they rarely work 'in branch');
- get past the desk jockey to access the underwriter once they've found them (like knitting fog).
This is why contractors need to go through a niche-specialist brokerage. The brokers there will have identified and built relationships with these elusive decision makers.
Why aren't branch staff trained to deal with contractors?
The market for contract-based underwriting is much smaller than the mortgage sector for permies. As such, lenders rarely teach in-branch staff the nuances of limited company contracting.
Due to the tax-efficiency of contractors, their true worth isn't clear from their accounts. The level of expertise needed to determine true affordability needs an experienced eye. Such specialist knowledge doesn't justify training general staff to service so small a niche.
What is a contractor mortgage (and what do I need to get one)?
A contractor mortgage helps independent professionals get on the property ladder with impunity. This type of mortgage underwriting is essential when contractors are:
- new to contracting or if a mortgage would take them beyond retirement;
- yet to accrue the accounts that lenders need to assess them on a self-employed basis.
Jumping through hoops to prove affordability at these junctures is no bad thing! Here's why…
What makes a good contractor mortgage application?
Criteria used for contract-based underwriting is specific, but varies from one lender to another. That's because they all have their own attitude to risk. That interpretation then helps forge the underwriting guidelines to which they adhere.
To move forward with your mortgage application, we need to learn about you and your business. This helps us match you with the right provider and their specific product(s).
Us considering your employment status at a personal level has another benefit. We can help the lender make an informed decision about accepting your application.
Factors lenders look for to approve a mortgage based on contract income are:
- a sustained daily/hourly contract rate (and often a minimum day rate);
- gaps between contracts; lenders don't like to see more than 4-6 weeks between contracts;
- duration of the current contract, including how long's left to run;
- trading/payment structure through which they operate, e.g. a limited company or payroll umbrella;
- current occupation: IT programmer; Engineer; Marketing; Financial Services; Business Analyst; Accountant; Oil & Gas;
- length of time contracting, including evidence of or the potential for a contract renewal/extension.
At first glance, that seems a lot of information to provide. Yet the vast majority will appear on a current signed contract and CV. Both of these documents will form part of the formal application.
Don't miss the opportunity your contract rate presents
The information you share helps us understand your situation with a degree of accuracy. And we have to, as there's no automated underwriting at the levels we negotiate.
So, now you know the criteria that make up contract-based mortgage underwriting, use them!
It's vital you get this information together before talking to a financial adviser. If you talk to an IFA who doesn't ask for these documents, you need to ask yourself why.
Using a contract to calculate affordability bypasses the typical self-employed criteria. In other words, accounts.
Don't let an advisor force you down the self-employed route. Limited company accounts won't realise the mortgage that your contract has the potential to.
What else do I need to know?
Deposits work for contractors in the same way they work for permanent employees. The more you can 'put down', the lower the interest rate will be on the balance of your mortgage.
In mortgage-speak, we refer to this outstanding balance as the loan-to-value ratio, or LTV. In English, it's the value of your mortgage loan compared to the cost of your new home minus the deposit.
So imagine that you have 5% deposit, the least for a contractor mortgage. The balance that you need to borrow is 95%, so you'd have a 95% LTV mortgage.
Also, the bigger your deposit, the lower your monthly payments. All in all, a lower LTV ratio will make both your home more affordable and you less of a risk.
Don't ignore your credit rating
Another factor that impacts your ability to get a mortgage is your credit history. And, of course, it's accompanying 'score'.
We recommend that you check your credit score before you apply for any mortgage. That's because failed searches leave a black (negative) mark on your history.
Ideally, you'd look to address any issues before an underwriter sees them. This might mean a wait for your corrections to take effect before you apply.
A mortgage underwriter will always reject applicants whose credit history shows too munch adversity. You can check your records online via Experian, Equifax or with an app, like ClearScore.
Above all else, please take this one lesson away with you. Mortgages secured using contract-based underwriting needn't be more expensive than a normal mortgage.
Also, using the right specialist broker reduces the frustration, risk and timescale of the process. They know what criteria mortgage underwriters use to approve applications in the swiftest manner.
Presenting only relevant documents gives you the best chance of securing a mortgage as a contractor. And yes: you can take that to the bank. But, best let us do that bit for you.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on January 11th, 2012 12:49pm in