How to Get a Mortgage as a Self-Employed Professional
Today Canadians are choosing to break free from the 9 to 5 grind and start up their own businesses. While being self employed is also a grind, it does however come with several perks and benefits.
The percentage of self employed professional in Canada continues to grow each year. Which makes us wonder why the “big banks” still make it difficult for self-employed applicants to qualify for a mortgage.
The issue that is consistent with the difficulty of self-employed mortgages remains to be provable income. While being self-employed provides you with many tax benefits that save you thousands of dollars. Writing off your expenses is the very reason why it becomes difficult for self employed applicants to qualify.
Mortgages in general can be tricky, so I will help explain what you need to know. As well as what lenders look for and how to ensure your approval as a self employed professional.
How Do the Lenders Evaluate Your Income?
There are typically two ways any lender will evaluate your income. It is up to your WISE mortgage broker to figure out which option would get you the best terms on your approval.
To calculate income most banks will only consider the average of the most recent two years of income, declared on line 150 of the borrower’s tax returns. Applicants who can prove their income through their tax statements, will in most cases be able to access the same mortgage product as traditional borrowers.
However, this way may sometimes prove ineffective due to the borrower writing off their expenses. Where self employed applicants run into problems is that they often write off too much and end up showing too little. The solution to this problem, is having access to lenders who allow stated income and other income qualifying methods to evaluate the borrower.
Applicants who cannot prove their income through their taxes effectively most use stated income. These applicants must have good credit and a down payment of at least 10%. These applicants may also be subjected to higher rates and fees because lenders view them as high risk due to their unpredictable annual income.
If you end up in a position where you are switching from a sole proprietor to a corporation. Make sure to work with your WISE mortgage agent. In most cases these transitionary situations are fine, if:
- You can prove your business has been running for a minimum of 2 years.
- That the business has not changed. (industry or line of work)
- that the stated income can be supported with business revenue/financial statements, etc.
They are looking for predictability and consistency. They want to see that the business and growth of income is consistent with business operations.
Documentation is especially important when applying as self-employed applicant. Lenders will always require the borrower to submit supporting documentation detailing their income, assets, credit score, tax returns etc. Lenders may require:
- Your Business Financial Statements.
- Contracts showing expected revenue.
- Personal and business credit scores.
- Confirmation that your HST and/or GST is currently paid in full.
- A copy of borrower’s GST licence.
- Article of Incorporation showing you are licensed.
- Proof that you are a principal owner in the business.
If your self employed its imperative to always have all your documents up to date and ready.
Using a mortgage broker
Using a Mortgage broker has clear, obvious advantages when applying for a mortgage as a self employed professional. It is exceedingly difficult, and time consuming to navigate and figure out which lenders specialize in what product and for which type of client by yourself.
Wise Mortgage brokers have access to all major banks and lenders and have extensive knowledge of the mortgage and real estate markets. We also have the connections and relationships needed to get you the best term and conditions on your approval. Therefore, a broker can connect you to the lender best suited to your situation.
In the end applying for a mortgage as a self-employed borrower can be tricky. Especially if you are not working with a wise broker. The toughest part in qualifying a self-employed borrower will always be the supporting documents and how you prove your income.
Self Employed, first time buying a home? Talk to your Wise mortgage agent today. Download and Enjoy our Free E-BOOK for first time home buyers. Gain some insight and prepare yourself before taking the leap in home ownership.
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