Here’s what you need to know about applying for mortgages
You might feel like you don’t have what it takes to achieve mortgage approval when your income and expenses vary as a self-employed person. That is not the case! You need to ensure your ducks are in a row and prove that you are efficiently managing your expenses. Lenders are more concerned with your financial management abilities rather than how much you make and how you make it. Oftentimes, if a self-employed individual can provide evidence of income, they can be eligible for regular mortgage rates and products. Individuals who cannot prove income may need to prove a strong credit history as well as a minimum down payment of 10%.
Here are some other documents necessary for a self-employed individual to obtain a mortgage:
Increase Your Chances of Approval
Besides having your documents in order, there are some additional steps you can take to make yourself more attractive to mortgage lenders.
Your Credit Score
Your credit score is one of your greatest assets. When it comes to applying for a mortgage, whether you’re self-employed or not, your credit score plays an important role in the approval. Paying off debt and responsibly accepting credit increases can positively impact your credit score. Paying bills on time or early will keep you out of collections. With that said, if your payments are automated, ensure you are checking your accounts regularly to ensure companies are not overcharging you. Check your credit report regularly to ensure you do not have any false inquiries or collections against your profile. If your credit score is high, you will be more attractive to a lender, therefore you may qualify for lower interest rates.
The Down Payment
Think of it this way, the more equity in your home, the less likely you are to abandon it in times of financial hardship. If you are able to increase the down payment on your home, the bank will likely see you as less risky. Additionally, a larger down payment reduces the amount of money that the lender is required to give you, resulting in more affordable monthly payments.
The less debt you have, the better. Your mortgage payments will be more manageable and you will have increased cash flow for day-to-day expenses and emergency funds.
You should be keeping accurate records of your self-employment history in addition to managing your tax and business records. Lenders are more receptive to applicants that can prove that they have been successful in self-employment. If possible, try to have at least two years of self-employment history under your belt before applying for a mortgage. With that said, keep an eye on interest rates while you build your self-employment history. If the rates are low, it may be worth applying for a mortgage even if you don’t have all of your history well-documented.
Down Payment Requirements
Mortgage Default Insurance (CMHC insurance) applies to self-employed applicants much like individuals with larger employers. This is only applicable for those that can prove income through tax Notice of Assessments. If you are putting down less than 20%, you must pay a premium, if you put down 20% or more, no premium is required. Across the board, mortgage premiums are added to mortgage payments and paid off during the amortization period, or the lifespan of the loan.
If you are having a hard time getting mortgage approvals from the bank, or if you’re simply looking for alternatives for future reference, there are other options out there. The main issue for self-employed individuals is that their income often appears low to banks due to tax-saving practices. Even applicants with a good credit score and high savings can find that banks are wary about lending money to someone who they feel has a low income. That’s where we come in. Private lenders are more concerned with debt-to-income calculations, this allows applicants to add deducted expenses to their net income to make it higher. It is important to note, customized approval processes can come with higher interest rates and other fees. This is because private lenders are more likely to lend to self-employed individuals even if their income and credit score aren’t high. As mentioned, the key to navigating alternative lenders is to ensure your tax and business records are up-to-date and accurate, and be sure to speak with a mortgage broker before applying for a mortgage. As always, we advise our community to get creative when it comes to homeownership. Consider all available alternatives and employ rate shopping to ensure you’re needs are met.
Rate shopping is the practice of checking several lenders when you need to borrow money. Whether you’re planning to take out a loan or apply for a mortgage, rate shopping helps you work out which lender best meets your needs.
Be open to extending your homeownership plan. We’re not telling you to put your dreams on the back burner! However, if you have less than two years of self-employed experience, if you are repairing your credit score, or only have 5% down, you may benefit from taking time to build up these categories on your application. Each day, more and more Canadians are choosing to be self-employed individuals or opting to be small business owners. While the banks tend to take a cookie-cutter approach to lending, at Wise Equity we take a different approach, we look at the individual and their situation.
Our agents are strategic and we can use different methods of proving income, that the banks do not. This enables our clients the opportunity to maximize their mortgage amount. If you’re Self-Employed and looking for your first, second or third home, or looking for some funds to grow your business, Wise Equity can help.
Secure the funds you need today. Apply Now!