Contractors Can Obtain Fair Mortgages

Contractor with his familyMortgages were initially created so that people with jobs would be able to buy a higher priced item like a home, since generally a home costs three to four times a person’s annual income. Unfortunately, those who are self-employed, such as contractors, don’t have what is deemed a “normal” job since they don’t get paid a fixed rate and don’t have the promise of an employer paying them a steady income.

The irony to this is that often contractors make two to three times more as self-employed workers than workers who work for a fixed rate, but because of this view of the self-employed, obtaining a mortgage can be difficult for contractors. Lenders typically view these workers as having a higher potential for defaulting on a loan due to the possibility of not receiving enough work and or losing their business all together.

Contractors have very few rights when it comes to unemployment, so if a period of unemployment is experienced, it can cause extreme financial difficulty and options are limited. Because contractors are often viewed as unstable borrowers, mortgage lenders usually don’t want to work with contractors.

There are some lenders though that are willing to provide finance for contractors, and there are now many that specialise in loans that are especially for self-employed workers including contractors. These specialised loans are specifically designed to fit around a contractor’s financing needs, and it simply just takes a bit of research to find these lenders. The products offered are typically designed with larger room for flexibility, giving contractors the chance to pay more on their loan when they receive a very well paying contract, as well as offering the option to use a payment holiday in order to extend payments if the contractors experience periods of unemployment.

Contractors may also want to look into obtaining a loan from a mortgage broker. Mortgage brokers are a good resource because they are specifically trained to look at a variety of mortgage products available within the mortgage market. Additionally, they are familiar with what questions they need to ask a prospective borrower in order to verify income and assess stability. This allows the mortgage brokers to find products that are best suited for the potential borrower’s needs, and take the time to evaluate the contractor’s entire financial information, including the worker’s employment history and credit file.

A major concern for people that are “outside of the box” is if they can borrow over 80% of the value of their property. This is because over this amount, approval from a Lenders Mortgage Insurer (LMI) may be required. If you apply with the right lender then this problem can be avoided as they can sign off the approval on behalf of the mortgage insurer, using their own lending policy.

When contractors use these options, having this room for flexibility can be extremely useful for them to obtain a contractor mortgage. Flexibility is one of the most important factors for any contractor who is seeking a mortgage, as they don’t have the typical secured income sources that others have. The flexibility to take a repayment holiday during unemployment or to overpay when extra income is received are perfect options for the income of contractors.

Using the overpayment option is an extremely attractive offer and should be used as often as possible. Doing this also gives the contractor a higher chance of being approved for extended payment holidays should a period of unemployment ever be experienced. Using this option also helps save on interest, and the amount of interest that is saved can prove to be a great investment. First of all, it becomes free of taxation. Secondly, if one were to overpay on their mortgage instead of putting it into a savings account for example, the interest savings on the principle loan amount is higher than the interest accrued in the savings account. Of course, it’s always a good idea to take some money and put it away just in case a financial emergency arises and then the contractor’s mortgage has a redraw facility or an offset account for their mortgage.

Searching for mortgage lenders and brokers who specialise in working with self-employed workers like contractors are easy to find with just a bit of research. Often these professionals advertise in industry or trade magazines, or a contractor can network with other contractors in the business to find out if anyone they know has a recommendation.

Just because one is self-employed and doesn’t have the stereo-typical income that other workers have doesn’t mean that they should be penalized. Often self-employed workers not only are denied for loans, they are also presented with large interest fees and punitive fees when they do receive a mortgage. In addition, they sometimes get offered self-certified mortgages, which are full of those outlandish interest fees and more.

As a self-employed contractor, don’t lose hope in procuring a mortgage. There are options out there and as more and more people find ways to become self-employed, the financing options for the self-employed will only continue to increase.

Lenders Mortgage Insurance

The Biggest Fee For Your Home Mortgage

Calculating LMI PremiumPeople who have not been affected by the housing market crisis in Australia may now be looking for the opportunity to purchase a home. Because of the global market downturn, property values and home prices have dropped throughout the world.

This means that there are big gains to be had for those people who can afford to purchase a home. However, when you find your home, there are a few things you should remember before jumping in to a mortgage head first. There are a few fees that are associated with your mortgage other than the monthly payment. For those who have a small deposit and need to borrow money from a lending institution, he or she will most likely have to pay lender’s mortgage insurance.

What is Lender’s Mortgage Insurance?

Lender’s mortgage insurance, or LMI for short, is a fee charged by the lender of funds in home loans. This fee is used to help protect the lender’s interest in the loan. For instance, if you have borrowed $200K and could not end up affording that amount, you would default on the loan.

The lending institution would not only be losing the actual loan itself, but all associated costs for originating and closing the loan. Therefore, borrowers are charged an upfront fee to help off-set any costs associated with a loan in default.

Do I Need It?

The answer is both yes and no. For those individuals who can afford a certain down payment on their loan, usually over 20%, he or she does not always have to pay an LMI premium. LMI is based upon one’s risk assessment for loan repayment. For example, those who only have a minimum down payment, possibly 3%, are considered high risk because he or she has not been able to save a significant portion of money for their purchase.

Oppositely, those who have a large down payment available and a solid job history may get the LMI fee waived. This is up to the discretion of the lending institution. Also, one should keep in mind that LMI insurance does not cover the borrower (home owner). This insurance is paid by the home owner as a requirement by the lender. Some loans that may require LMI would be:

- Property Investment Mortgages
- Construction Mortgages
- Owner/Occupier Mortgages

Please note that if you are making interest only repayments then some mortgage insurers will load your premium. As your loan will not be reducing over the term, there is a higher risk to the insurer and so a higher premium is charged.

What is the Cost of LMI?

When a lender starts to talk about fees, many home owners get a nauseous feeling in their stomach. One of the most feared sounds is that of the calculator adding document fees, attorney fees, LMI fees, and all other costs associated with loan approval that makes the ribbon on the adding machine sing.

However, LMI does not carry the unpredictability as other fees because it has been government regulated. LMI fees depend on the amount of the home loan, how much money was put down, and the length of the loan itself.

One of the leading providers in Australia for LMI is Genworth Financial. Genworth Financial can provide its customers with the purchase of LMI and help with the many other aspects of home mortgages. You cannot choose if your lender uses Genworth LMI or QBE LMI, however you can apply with a lender that uses these particular insurers, thus ensuring you get the lowest possible premium.

Mortgage education

If you’re looking to buy a home soon, then you’ll begin to notice all the advertisements from banks and hear your friends talk about mortgages. With such a bewildering range of features, lenders & options it’s easy to get confused! Getting advice from a friend is great if you are wondering what movie to see, but it isn’t appropriate for a mortgage.

Seeking help from a professional advisor is always the best way to go. However what if you want a second opinion. Many of us don’t have the financial muscle to see several financial planners & get a statement of adivce from all of them.

But don’t worry, there are several ways you can get advice, without the price tag!

  • Try asking a question on a home loan forum, an expert or professional investor may reply to your post with a unique perspective.
  • Read some mortgage articles from an industry insider or specialist journalist.
  • Read a mortgage blog for handy tips on managing your loan.

If you still aren’t sure if your mortgage advisor is acting in your best interests, then ask them some questions to find out what expertise they have and why they are recommending that mortgage:

  • Why do you believe that loan is superior to the others?
  • Can you give me a copy of your commission schedule?
  • Do you have accreditations with all of the prime lenders?
  • How long have you been a mortgage broker for?
  • What other experience do you have in the finance industry?

If all else fails then consider seeking the advice of a second mortgage broker. Unlike financial planners, most mortgage brokers allow you to visit them the first time for free. This is because they are paid when you take out a home loan, it is in their interests to see as many people as they can!

Happy mortgage hunting!