A step-by-step walk through the contractor mortgage process
Getting your foot up onto that first rung of the property ladder can seem a huge step. Trying to organise a competitive mortgage and all it entails on top of your current schedule is daunting. If you're trying to run a successful contracting business too, it becomes a mighty task.
Buying a home is a monumental commitment. If you've never bought a property before, it's easy to underestimate the work involved. Like all successful projects, you need to plan first.
We can walk you through the mortgage process that's tailored specifically for contractors. We'll lead, you follow…
How the contractor mortgage process should work
…As a contractor, there's a right and a wrong way to go about securing a mortgage loan. If you've been to your local branch, used a call centre or searched the Internet, you've already figured that out.
That's because there's a ton of misinformation online about how mortgages for contractors work. As specialist brokers invested in all types of self-employed activity, we know what's right from what's wrong.
We're here to highlight the good and the bad for you using simple tried and trusted terms. So whatever's causing your virgin mortgage nerves, relax.
Are you ready to get your head around how contractor mortgages work from the experts? Great. Here we go, with our…
…Idiot’s Guide To Contractor Mortgages
No two contractors’ circumstances are identical. Thus, we offer different mortgage solutions to suit a variety of independent professionals.
Let's take an example. Imagine two contractors do the same job for the same client for the same day rate. They may even use the same accountant or umbrella company.
But the first only has one year’s trading history; their colleague is a lot more established.
That difference defines the way they should approach getting a mortgage. The 'time served' factor can see lenders' offers differ considerably.
Which mortgage lender is right for my circumstances?
Some lenders will demand at least two years’ accounts. A select few take on only one years' accounts for their mortgage underwriting process.
In our example, the broker may send the contractors' applications to two different lenders. From experience, the broker would know which lender was best suited to which applicant.
And that's the sign of a true specialist. They wouldn't expect you to know which underwriting process for home loans was right for you. They'd do it for you, not leave you to figure it out on comparison web pages.
Contractor mortgage brokers are like you: specialists in their niche
Dealing with contractors daily, specialist brokers know the few genuine contractor-friendly lenders out there.
As such, their service can save you both the leg work and your most valuable asset: time.
These are the reasons you’re considering the specialist route, right?
If I'm on the right track, you may have crashed and burned on the High Street already. We know, because many contractors who come to us have hit dead ends there, too.
So enough of that. You're done wasting time facing blank-faced branch staff.
Now you're here, we know which mortgage lenders limited company contractors can approach. We'll use their mortgage underwriting process to best prepare you for home ownership.
An Agreement in Principle asserts your home-buying status
Your IFA must first identify a lender whose criteria aligns with your circumstances. A specialist contractor mortgage broker is best placed to work this out for you. They work with contractor-friendly lenders day in, day out, so know which will look upon your situation most favourably.
You could try the High Street route, but amenable lenders are few and far between. You might get a contractor mortgage agreement in principle from the Halifax, for example. But even then, not all of Halifax's advisors automatically use contract-based underwriting. The High Street route remains a bit of a lottery for specialist borrowers.
It's important to note, an AIP (a.k.a. a “Decision in Principle”) is not a firm mortgage offer. At this stage, an underwriter hasn't even seen your application!
Lenders will issue an AIP on the back of what you've told them. At this point, the rigorous means and credit checks are still to come. The AIP will only certify that your borrower profile is a good fit for one of the lender’s mortgage products.
But it's worth doing. If an advisor gives you an AIP on the basis of your contract, you’re halfway there!
There are many reasons you should choose a broker with close ties to underwriters. Accessing decision makers who understand contracting is just one of them.
What are the benefits of securing an AIP?
An AIP signals your intent to all in the chain, including the vendor(s) of your ideal home(s).
This could prove critical if said vendor has priced the home you want for a quick sale. If other interested parties don’t have an AIP, an estate agent will favour your offer over theirs.
If you’re not in a race against time, an AIP can still be the ace up your sleeve.
How are you at negotiating? It's not the British thing to quibble. But informing the vendor you have an AIP in place could make them more amenable to your offer. In a competitive real estate market, you need to bring every tactic at your disposal into play.
Understanding Budget to Help Streamline Your Property Search
You may already have an inkling about the type of home you’re hoping to buy. Moreover, you’re apt to know the location if not the type of property in itself.
But before you start browsing properties for sale, you ought to know how much you can borrow. Without setting this milestone, your search for the ideal home may come to nothing.
With your Agreement in Principle in place, you can target properties you know you can afford.
Whether you choose homes at the limit of your budget or well inside is your call. At least by having an advisor offer you an AIP, you know where to draw the line.
Where to look for your new home
Online property sites are a viable alternative to the High Street. Most estate agents today have user-friendly websites. They'll give you all the information you’d get in branch and more.
It's easier to visualise how accessible commuting is from your new home online. There's also no pressure and you can take the time to make informed decisions.
There are also property sites that collate data from other online estate agents. You can organise all the homes within your budget and specification under one roof.
Should I take up an estate agent’s offer of trying to get me a mortgage?
There are estate agents who'll offer to organise your mortgage for you. That’s both those on the High Street and those online.
You need to tell them that you already have an AIP from a specialist broker. If they ask why, explain that you need a mortgage using contract-based underwriting. This should deter them from pestering you further.
But why shouldn’t you go with an estate agent’s offer?
Online mortgages can prove problematic for contractors and freelancers. You'll be hard pushed to find one that’s best tailored to their circumstances.
Why? Because websites are like High Street lenders: their mortgages best suit full time employees.
Don't fall into the 'self-employed' mortgage trap - they're not the same
In some instances, agents' portfolios may encompass mortgages for the self-employed. Don't be tempted.
They're not the type of loans you need to make the most of your day rate. It's your gross contract earnings you want lenders to use to determine what you can afford.
Contractors don’t fall into either the lender's full-time employed or self-employed categories. They're a mix of both and advisors struggle to ascertain their true mortgage affordability.
Feel free to do the exercise: ask the agent if they offer contract-based underwriting. Nine times out of ten, they'll never even have heard of the process, let alone offer it.
That's why you need a specialist contractor mortgage broker who understands how contractors work. Accept nothing less than one with proven experience in presenting and securing such mortgages.
Also be mindful of fees. Most brokers charge for their services, be sure to ask what’s covered.
Make an Offer (that the Vendor Cannot Refuse)
You’ve found your home. You’re armed with an AIP. Now it’s time to begin negotiations that will lead to the vendor accepting your offer.
Fundamental to this process is your knowledge of how much you can afford to pay. Balance that against how much you believe the property’s worth to plan your offer.
Don’t panic: you’re not expected to know this off the top of your head.
Instead, this is where estate agents can prove useful. Leverage their professional and local knowledge. They'll help you get a grasp of the real market value of the property you want to buy.
Also, utilise available websites to bring yourself up to speed. Find out what similar properties in the postcode(s) have sold for in the last few months.
Once you have all that information, you can table a confident offer. You don’t want to pay over the odds for your new home, but you do want to be sensible about it.
Buy with your head, not your heart
An honest estate agent will act in your interests and liaise with the vendor on your behalf. Be 100% transparent about your budget limit. Under no circumstances allow them to persuade you into making an unrealistic offer.
It is easy to get caught up in the thrill of the prospective deal. Owning the home you’ve set your heart on can override your budget-conscious brain. Remember why you set a budget: to prevent your dream home becoming a financial nightmare!
There is another reason why you should buy with your budget, not your heart.
If you pay an inflated price, the lender may refuse to grant you the mortgage. Why? To cover their own investment.
If you default on your payments, the bank needs to be sure it can recover the amount you borrowed. On that note, a bigger deposit will help negate that risk and could work in your favour, too.
Those are the down sides, but you do need to be aware of them. Once you and the vendor have agreed a price, the process of buying your home can begin.
Submittal and Assessment of Your Mortgage Application
With the cost of your home settled, you're ready to move on to the next stage. Through your broker, it's now time to submit your mortgage application.
You’ll need to forward information to them for underwriting to process your application. In the case of (most) contractor mortgage applications, documentation you'll need is:
- Passport and/or driving license;
- recent utility bills;
- three months’ bank statements;
- your signed current contract*.
*If there’s below a certain term left to run, you may need an extension. The bank from whom you’re getting the mortgage will dictate that duration. A specialist broker will tell you what the underwriter needs, based on their experience.
If you have any questions, now's the time to ask them. They should be willing to guide you through this part of the process in its entirety.
Specialist brokers often have a database of reputable solicitors whom they’re willing to recommend. This will help you estimate the legal costs and work them into your budget. Like the lenders, the solicitors will have a proven record of completing contractor mortgages.
Property Valuation and Prerequisite Searches
Before the lender makes a formal offer of a mortgage, they need to safeguard their investment. They do this through checks that ensure the home you’re buying is worth what you’re paying for it.
Once satisfied that it’s suitable security for lending purposes they’ll confirm their mortgage offer.
The types of checks they carry out include:
- area searches;
- land searches;
- building surveys of the property and its plot.
Either your solicitor or the lender will undertake these searches. The aim is to ensure that your property is sound on a structural footing.
They'll also look for signs of subsidence or long-term damp. Either could have already damaged or could cause damage to the property in the future.
They’ll also uncover planned local developments that may impact the value of your home. And they’ll ensure that your plot isn’t located on contaminated land.
What if there's a problem with the searches?
Such searches could prevent you (and your lender!) from making an expensive mistake. Yes, they cost and take time. But both you and the lender need to be sure that your investment is as safe as the house it's buying.
That said, most issues uncovered by the searches are minor. If anything's found, the vendor can often resolve them without jeopardising the sale.
If anything serious does arise, you may want to renegotiate the buying price. That's if you want to proceed with the sale.
If you want to go ahead, you have two options:
- ask for an equivalent reduction in cost of reparation in the sale price;
- ask the vendor to resolve those problems themselves.
If the vendor chooses option two, those reparations become a condition of sale. The vendor must complete them before the exchange of contracts takes place.
Also worth noting is that the lender may refuse to make a mortgage offer until you find a resolution.
Mortgage Offer and Signing Contracts
So, the searches and checks are complete and all issues resolved. Woo-hoo! Your mortgage lender should now contact your broker with their official mortgage offer. They will also send a copy to you and your solicitor.
Upon receipt, your adviser will confirm to you that your application is proceeding. At this stage, it’s usual for you to inform your solicitor to finalise your home purchase.
Next, you and the vendor will sign the contracts. You’ll also need to sign the mortgage deed and declarations. Expect close communicate between you, your broker and solicitor at this stage. All parties want the completion to go to plan and on time.
Now we’re getting to the sharp end. It’s time for the exchange of funds. You will need to have your agreed deposit in place, ready to transfer.
Don’t panic when the solicitor asks you for the 10%, 15% or 25% you're putting down. It’s usual for them to retain your deposit whilst the parties exchange contracts.
They’ll then transfer the deposit once the exchange has taken place. Once completed, this forms a binding contract between you and the vendor.
If either party pulls out of the sale at this stage, they’ll forfeit the deposit to the other party. So, if the vendor drops out, you get your deposit back. If you pull out, the vendor has the legal right to keep your deposit. Yes, this is when it gets serious.
Make sure your investment is as safe as houses - plural
There’s another aspect for you to consider, too. As soon as you exchange contracts, you’re responsible for your new property.
Here you need to be careful. You may be responsible for your existing home’s insurance and your new one.
It’s easy to think that incurred damage to a new property ‘will never happen to me’. But have you ever heard of Murphy's law? If the worst can happen, it will.
Don't you get caught unaware for the sake of a month's premium here. Imagine stretching your budget to buy a new home only for the worst to happen before you even move in. It doesn't bear thinking about, does it?
Take out a comprehensive buildings insurance policy on your new home, even if you’ve not yet moved in. Better safe than sorry, eh?
You complete me!
So you’re entering the final straight, the winning post is in sight. You now need to agree a completion date. Contact your solicitor to set a date; they in turn will confirm it with the vendor’s solicitor, and so on.
Once finalised, your solicitor will request the funds from your mortgage lender. They’ll transfer your mortgage into a client account, held by the lender on your behalf. It’s this account that will facilitate the sale with the vendor’s solicitor.
The last step is for your solicitor to send the signed transfer deeds to the vendor’s solicitor. It's this final act that completes the sale. Once transferred, that’s it. You’ve completed on your contractor mortgage and have the keys to your new home.
Keep this guide close to hand (save a PDF version). It will simplify the whole contractor mortgage process when your time to buy a home comes. In the meantime, happy house-hunting!
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.