Working as a contractor is a unique way to pursue a career. Contractors are in the great position of being self-employed individuals with total control over where, when, and for whom they work.
They have the luxury of being their own bosses in most respects. But not everything is sunshine and roses for contractors. There are some definite challenges to this sort of thing.
Getting a mortgage is one of those challenges. Because of the nature of their work, contractors are not able to document their income as simply or easily as salaried employees. It is not as easy as producing a single record that shows how much has been earned from a single employer over the course of a year. Contractors have to produce a bit more. The good news is that contractor mortgages are pretty standard in most countries.
Contractor – It’s About Income
From a contractor’s perspective, it is all about income. Even with all of the contractor mortgage lender criteria explained by lenders, approval still boils down to whether or not the borrower has sufficient income to repay. If the income is there, it is a matter of proving it. If the income is not there, a mortgage likely will not be forthcoming.
There are different ways to look at contractor income. The UK offers a good example. There, lenders look at three different possibilities for measuring income:
- Daily rate
- Fixed term
- Construction Industry Scheme (CIS).
Daily rate contractors are those contractors that work for a set rate on a daily basis. They may or may not work for multiple companies, but every company they do work for pays them on a daily basis. Within this category, lenders look at contractors who earn above and below the £220 threshold.
Fixed term contractors are those who work for a single company for a contract term of between three and six months. During that term, they are paid a regular salary with National Insurance deductions handled by the employer.
Finally, a CIS contractor works under a government scheme that includes completing a self-assessment tax return and having the employer deduct National Insurance contributions during the contract term. This classification is reserved for workers in the construction industry.
Applying for a Mortgage
How a contractor applies for a mortgage relies heavily on how his or her income is viewed. Again, we can use the UK as an example. A contractor applying for a mortgage there would have to consider how income would be demonstrated sufficiently enough to satisfy a bank or mortgage broker.
A daily rate contractor would disclose his or her daily rate. The loan officer would multiply that rate by the number of days worked for a particular employee, and then multiply that number by 46 weeks. This will determine how much the contractor is earning from that particular employer during the course of a year.
Proving this income is a matter of producing invoices and bank statements. The contractor would also have to prove at least a couple of years’ experience as a contract worker.
Lender – It’s About Risk
From the lender’s perspective, it is all about risk. The universal nature of risk is apparent throughout the mortgage lending industry around the world. It was especially apparent in the years following the financial crisis of the previous decade.
That crisis was precipitated by a mortgage lending collapse that began in the US. Its ripple effects caused a similar housing crash throughout Europe. As a result, regulators clamped down on the banking industry and began requiring them to put more effort into investigating the credit worthiness of new borrowers.
Knowing what we know about that time in economic history makes it easier to understand why contractors have to do more work to apply for mortgages. The simple fact is that demonstrating contractor income is not as easy as demonstrating a single stream of income from a normal employer. Banks and private lenders simply cannot take the risk on a loan applicant who cannot adequately prove income.
Mortgage Deals Are Out There
Contractor mortgages are pretty standard in most countries. Despite differences among the details, the banking systems in most countries do make mortgages available to contractors. It is just that contractors have to work a little harder to prove their income.
One final point in closing is that contractors generally have an easier time of it when they choose to use a mortgage broker rather than going directly to a bank. Mortgage brokers know all the tricks and tips of the trade that can help contractors get particularly good mortgage deals.