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Had trouble as a contractor getting a mortgage?

Contractors having trouble getting a mortgage could secure the funding they need to buy their new property by applying via a contractor specialist financial adviser that has access to lenders who understand contracting. Most contractors should be able to get a mortgage.

Contractors may get turned down by their own bank because it is applying standard employee or self-employed evaluation criteria to their case.

By using a financial adviser that specialises in contracting, contractors will get their mortgage applications in front of lenders’ underwriters who are experts in lending to contractors and understand what contractors do and how they work.

Lenders will also turn down applications that have complications that may have nothing to do with the contractor, but don’t fit the lender’s standard model and are in the ‘too hard basket’ for the lender’s team to solve. See our guide to the preferred lenders.

Why do contractors get turned down for mortgages?

Contractors are often turned down for mortgages because they approach their own bank, which looks at their earnings and determines that they fail the affordability test.

Frequently contractors have a low salary and modest dividend which shows half the earnings they need. High street lenders like Barclays or HSBC won’t understand, for example, the £85,000 of retained profit in the contractor’s business and that this signifies that a contractor can more than afford their mortgage.

Most lenders effectively ‘outsource’ non-standard lending to specialist brokers: Lenders take a very two dimensional approach when contacted directly, whereas via the broker channel they can be more flexible as it is not their staff having to deliver advice to niche clientele. They would rather outsource this advice to people who know it better.

Don't want to get turned down? Read our top 10 tips for contractors to secure a mortgage.

What do lenders look for in a strong application?

Whilst advice and some mortgage processing may be outsourced, many lenders have underwriting teams that understand their markets very well: Some lenders have underwriters who deal exclusively with specialist contractor providers.

Underwriters will delve into the technical content in a contractor’s CV that has been supplied in support of a mortgage application. They are not experts in IT, but they understand what a project manager or developer does, what technical skills they need and who the leading clients are.

So, contractors must ensure that their CV is up-to-date and accurate, containing industry experience, relevant qualifications, previous roles and showing no gaps. A lender’s underwriter will spot out-of-date CVs and this could impact negatively on the mortgage application.

What complications can get a mortgage application turned down?

Poor credit history, career gaps and undisclosed credit are just some of the reasons that lenders will refuse a mortgage application but which can be fixed if a contractor has gone to the right financial adviser.

There can be other complexities that will result in a lender’s underwriters turning down an application. The way that traditional lending works when it comes to flats is that the lender is happy for the borrower to be the leaseholder, but not the freeholder.

This is because as the freeholder, you have certain obligations for the whole building. For example, if something goes wrong with the roof, the freeholder or management company would have to put it right, and also fund the process. This represents a potential liability.

How contractors can help make mortgage problems go away

The simplest way for contractors to make their mortgage problems go away is to approach a contractor specialist financial adviser at least six months before they will need their mortgage.

The specialist financial adviser will both understand how a contractor works and how best to present their finances. The adviser will also have access to specialist underwriters who similarly understand contractors.

The lead time enables the adviser and contractor to go through the lenders’ lengthier evaluation processes that have been introduced since the Mortgage Market Review (explained here). That way, they can be sure that they have the funds agreed before they start looking for their property, and avoid the disappointment of being turned down.

Updated: Tuesday, 24 October 2017

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