When getting a mortgage, contractors can be met with some resistance, as they don’t fall into the ‘I am an employee’ box or the ‘I run my own business’ box when banks do their lender assessments. But, we think contractor mortgages simply need a different approach.
Professional contracting is becoming more common in Ireland, with self-employed consultants and project workers found across most sectors, from pharma and medicine to finance, IT and engineering.
And, while the assumption was that getting a mortgage as a self-employed person is more difficult; in reality, contractors fare no differently to a PAYE employee, once they prepare. In fact, professional contractors can often borrow more, especially as more companies and organisations are seen to engage professional workers on a contract basis, income tends to be considerably higher, and specialist contractor skills are in demand.
Working with a mortgage broker who understands contracting is helpful; this is one of the reasons Mortgage Navigators came about, as a division of Contracting PLUS financial services.
In terms of specialist mortgage guidelines for the self-employed, the following approach will help make the process as simple as possible.
Banks do not take too many risks with money, so when you’re self-employed and applying for a mortgage, you need to show you have a sustainable income stream; and, ideally, that both your contract and your income are sustainable.
The following will help with a successful application, if you can show;
1. You have been contracting for a minimum of 12 months, and have previous contracts to back this up.
2. You have more than 6 months remaining on your current contract, or, if less than 6 months, a new contract offer in place for when the current one ends.
3. You are working in a skilled/professional role, in a secure sector, with long term prospects of further contracts being offered
Lending institutions need this level of comfort that you are in a secure contract position and have the expertise to get future contracts when your current one is finished.
You need to support your application with materials and documentation that give comfort to the lender that you are a good qualified risk. Documents required for a contractor or self-employed applicant will include;
Once a contractor’s documentation is up to date, and they have sufficient income, they are in no way disadvantaged, compared to any employee looking for a mortgage.
Maximising the chances of getting mortgage approval means being organised and keeping accounts up to date.
Copies of bank statements, contracts, accounts, payslips, tax returns, passport, proof of address, etc will be needed. Setting up a free cloud storage account, and saving and organising the documents needed, will save time when applying.
Contractors should check their credit rating with the Central Credit Register www.centralcreditregister.ie, and amend any mistakes before applying for a mortgage.
It is good to reduce any personal debt and borrowings, where possible, and try to have money saved, ideally showing the ability to build up a fund through regular savings. Showing additional savings, to cover salary in quieter months, helps tremendously.
A deposit is needed, to buy a home, and showing that an adequate cash deposit is available from savings is a good start. Banks are fine with people having a gifted deposit, or availing of the Help to Buy Scheme or the First Home Scheme. But, they still like to see some level of deposit has been gathered, towards the deal.
Six months bank statements will be reviewed, so keep them ‘tidy.’ Remove direct debits to gambling websites, show sensible spending habits, avoid random large withdrawals, clear off credit cards, and pay down personal loans, where possible.
Generally, lenders prefer to see two to three years of accounts, to assess income stability.
Calculating self-employed income for a mortgage involves an assessment of annual earnings, including salary, dividends and retained profits. Lenders consider an average of the most recent years’ earnings, so it is a nuanced process, and financial advisors linked to the contracting sector are invaluable.
Essentially, mortgage approval will be based on the ability to give the lender back-up, and prove the contractor is in a position to repay a loan, in the long-term, according to the terms offered.
Applying for a mortgage is no different to applying for a job. You put your best foot forward at ‘interview’ stage and prove you’re a trustworthy individual, with sensible spending and saving habits, who is unlikely to give the bank hassle.
Time is money, where people are self-employed, but investing time and effort on financial records will be important when it comes to mortgages.
The Mortgage Navigators USP in the market is understanding contracting, and understanding lending. Being able to combine these expert insights, our business is to smooth the route for self-employed contractors, so there is no fear the bank’s computer, which manages the lending boxes, says no!
Article by Margaret Barrett
Managing Director at Mortgage Navigators,