Are you self-employed? Do you think that applying for a mortgage as a self-employed individual is too difficult? Does it feel like you’ll never get approved?
So many lenders have made getting a mortgage difficult for self-employed individuals looking to apply for a mortgage. But, lucky for you, you’ve come here. We’re going to break down the process of how to get a self-employed mortgage.
Getting approved for a mortgage program for self-employed individuals shouldn’t be as difficult as some people make it. Let’s talk about how we can help you navigate a self-employed mortgage in Canada.
If you’re a self-employed individual and you’re looking to get approved for a mortgage, you’re going to have a self-employed mortgage.
More broadly, a self-employed mortgage can be a residential mortgage for a home or a commercial mortgage for a commercial property such as a business. In either case, the owner or purchaser of the property must be someone who is self-employed or owns their own business or corporation.
Since those who are self-employed have to prove their finances differently from a salaried employee, the application and approval process for a self-employed mortgage is much different than the average process. Sometimes, self-employed individuals don’t have a net income that is large enough for the typical mortgage in Canada.
Because of all of the hoops that self-employed individuals have to go through, many of these people begin feeling frustrated by the loan approval process.
When it comes to our self-employed clients, we offer two different methods for home loan applications. These methods also apply to those of you who receive a T4A from your employers and are responsible for your own taxes.
Let’s review how you can use each method to your advantage as one of Canada’s many business owners.
For this first method, our team will evaluate your notice of assessment over the past two years. You should receive a notice of assessment every year from the Canada Revenue Agency. This is a document showcases the government’s evaluation of your tax return.
Your notice of assessment will show us the income that you’ve claimed for the years that the documents were for. The lender will take the average of the last two years of income if the income of the most recent year is higher. If the most recent year’s income is lower, the lender will take the lower income since the income has decreased.
However, most self-employed individuals don’t declare their full income on their tax returns. Therefore, their notice of assessment doesn’t show their full income.
With several kinds of tax write-offs, self-employed individuals are able to deduct expenses while claiming credits. This gives a flawed view of the individual’s income.
If you feel that your notices of assessment may give a false view of your income, we highly recommend that you consider the second method.
You can also qualify with bank statements. Business bank statements show the cash flow for the business. Although, some individuals also opt for using their personal bank statements to prove their income.
Your six months bank statement can give us an idea of how much you’re making currently. With the last six months of your business’ cash flow, we can annualize your earnings to determine whether or not you qualify for a stated income mortgage.
Using your bank statement for mortgage loans may be easier for those of you who do have a flawed income report on your notices of assessment. This is also a great choice for those of you who haven’t been self-employed for a long period of time.
If you’ve recently become self-employed or your recent income doesn’t match your older income, you should opt for this method of applying for a mortgage.
If you’re worried that a mortgage lender may not approve your mortgage application, there are several steps that you can take to strengthen your application. The more information that you can give the mortgage lender, the better off your application is.
Let’s talk about the details that a loaner is going to want to see from you:
Credit scores greatly affect the fate of any loan application. If you want to nearly guarantee an approved application, you need to have a good credit score.
Unfortunately, there is one big problem that business owners have with credit scores: debt. Businesses – especially small businesses – are notorious for going into a large amount of debt before they are financially stable.
As long as you’re making your payments, this isn’t a problem. However, sometimes these payments can cause business owners to hurt their credit score via missed and late payments.
In addition to making sure that you make payments on-time, you should have several different lines of credit. From credit cards and car loans, you should have a profile for the mortgage lender to look at. They’ll be able to see your credit history for the past seven years, so you should try to perfect your credit habits during the few years before you apply for a mortgage.
If you can, we suggest that you offer a higher down payment for the mortgage loan. Usually, mortgage lenders will state a minimum down payment that they require everyone to pay. However, it may be best to go over this amount.
If you pay a higher amount up-front, you’ll have greater equity in your home. Those who have more equity in their home are less likely to give up on the home when their financial situation is more difficult.
Plus, if you pay a higher down payment, you’ll have less to owe the lender later.
If you’re qualifying for a mortgage through your bank statements, you must pay 20% down. However, if you’re qualifying through your notices of assessment, you’re required to pay 10% down when purchasing an owner-occupied home. Standard Canada Mortgage and Housing Corporation insurance will apply on down payments up to 20%.
The less debt you have, the better. Not only is it less for you to pay for. But, it also looks great to mortgage lenders.
Even if you never accumulated much debt, it shows your lenders that you can handle the payments that you currently have.
We want to clarify that having debt isn’t bad. You can use debt intelligently. However, you should be careful not to let debt take over.
The longer you’ve been self-employed, the more trustworthy your financial situation appears to your mortgage lender. If you can sustain self-employment financially for a long amount of time, this shows the mortgage lenders that your job is more stable.
Luckily, self-employed individuals have shown longevity in their careers overall. The longer you’ve been self-employed, the more that you prove that your job is a long-term commitment.
For those of you who are applying for a mortgage with your bank statements, a minimum of two years as a self-employed individual is required. Sometimes, lenders make exceptions based on the down payment and employment history.
More information is always better. You should keep track of your business records for the past several years.
The better organized your information is, the faster you can get the information to your mortgage lender. If your records are disorganized or you aren’t able to locate information, this may come off negatively to your mortgage lender. They may be less likely to trust your ability to handle a mortgage.
We recommend gathering your financial information before you apply for a mortgage. This will keep everything within reach whenever you need it.
If you have bad credit, there are other ways to ensure that you’re approved for a mortgage loan. Credit is a big factor in a company’s decision to loan money, but it isn’t the only factor.
These are some of the other considerations that lenders make when they’re looking at a mortgage application:
Given the overall strength of the application, the lender will decide whether or not you qualify for a mortgage. It isn’t just dependent on your credit score.
If you’re nervous that your debt ratio may be too high, you might want to consider alternative lenders. They have higher debt-servicing ratios than traditional banks.
In fact, alternative lenders may allow for a gross debt service (GDS) ratio of up to 60% of your income. Plus, the total debt service (TDS) ratio may be up to 60% of your income as well.
Traditional banks only also a GDS of up to 39% and a TDS of up to 44%.
With alternative lenders, you’ll have a better chance of getting approved with a higher amount of debt.
If you don’t think refinancing is an option for self-employed individuals, think again.
Mortgage refinance for self-employed individuals is definitely possible. Plus, it’s a great way to provide relief for business owners who may be going through a rough economic period.
Mortgage refinancing is a great way for individuals with existing mortgages to readdress the terms of their agreement and take out equity from their home. The individual could want a lower monthly payment, a lower interest rate, a shorter term, or money from the appreciation of their home.
Whatever their preference, mortgage refinancing gives the individual the power to look for a better deal than their initial mortgage. Once they’ve talked to various lenders and found a deal that they like, they can pay off their first mortgage and start making payments on their new one.
Mortgage refinancing is also a great way for individuals to consolidate their debt. For those of us who have bills upon bills piling up, debt consolidation for self-employed homeowners is a safe idea for handling those stacking bills. It allows the individual applying for the new mortgage to combine the amount left on their existing mortgage with other debts that they may have.
By taking the loan in and redistributing the money to their creditors with debt, they can work on paying off one payment a month rather than paying several. It is usually more affordable and leads to less accumulation of interest.
Refinancing your mortgage isn’t easy through the banks, especially for self-employed individuals. This means that the qualifications for these mortgages are more difficult. The major banks are regulated in such a way that they require self-employed individuals to claim higher income on their NOA’s (notice of assessments) and the declared income can be used to qualify for a mortgage. The challenge with this is that most self-employed homeowners don’t declare their true income as they have expenses and write-offs applied against their income.
Alternatively, there are special mortgage programs such as the bank statement mortgage, also known as the stated income mortgage, which allows self-employed homeowners to refinance up to 80% of their home value, using their 6 months business bank statements to qualify. The qualification is based on the cash flow of the business in the last 6 months.
If a self-employed homeowner doesn’t qualify under the bank statement mortgage program today, it doesn’t mean they won’t qualify in the future. Many self-employed homeowners will take out a second mortgage or home equity loan to consolidate their debt or use it for business expenses, for a period of 1 year, until their business starts to accumulate a better history of deposits going in the business bank account. As the second mortgage term is approaching renewal, and the business bank statements are showing stronger deposits, we can combine the existing first and second mortgages into one mortgage.
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