There is no denying that the mortgage borrowing landscape is changing. One of the product lines that saw repeated revisions was the self-employed mortgage niche. In the mortgage world, you are self-employed if you own a portion or all of the business you derive your income from. Self-employed status can also include contract employees who don’t have their taxes and benefits deducted by the employer they are under contract with for their services. There is a marked difference between now and three years ago when it comes to qualifying for a mortgage if you are self-employed. If your mortgage is up for renewal you can avoid re-qualifying altogether by simply renewing your mortgage with your current lender though if you’re purchasing and obtaining a new mortgage or refinancing by adding more funds to your existing mortgage, you can expect the mortgage process to go as outlined below:
When looking for a mortgage, the majority of lenders are able to look at self-employment income in two very different ways: “stated income” or “verifiable income”. If you’ve been self-employed for longer than 2 years and your income taxes with the government are current, we can verify your income amount via your most recent 2 years personal earnings history which is documented by your Notice of Assessments or Income Tax Returns. If you have been self-employed for less than 2 years or cannot verify your income via traditional methods, you are now a “stated income” borrower. This simply means we can “state” a qualifying income that is reasonable for your line of work. By viewing your income this way, you may be able to qualify for a higher mortgage amount than if we had to use your actual paper income that you declared to the government and paid personal taxes on. The requested documentation to support your self-employment varies depending on your income type and the lender you are applying with. For instance, different documentation is required if you have an incorporated company versus if you are a sole proprietor. When you are applying for a mortgage under a “stated income” mortgage program, don’t be surprised if your approval is accompanied by higher rate, extra fees or even a larger downpayment.
In order to qualify to purchase a property with the minimum 5% downpayment, you cannot state your income as you need to have verifiable and documentable income along with a good credit history in order to meet the minimum downpayment requirement of the 5%. If you have no choice but to “state” your income in order to qualify for a mortgage, you have to provide a minimum 10% downpayment and also have good credit to get best rates. If you have or have had any credit issues and your income cannot be verified the traditional way, expect to provide 15% – 25% downpayment in order to qualify for a mortgage. And depending on the lender, some require your downpayment be from your own resources as it cannot be borrowed or gifted. This is when I strongly recommend you speak to a mortgage professional who is experienced in self employed borrowings about the options available to you.
When you are applying for a mortgage while self-employed, your income confirmation requirements vary depending on your specific employment details as follows:
- Notice of Assessment: This Canada Revenue Agency document confirms your personally declared income; it is predominantly used to determine if you owe outstanding personal taxes. For some lenders this is a mandatory requirement for all self-employed borrowers though other lenders may allow alternative income tax confirmation.
- Business Financial Statements: These would be required if you earn your income from an incorporated company you own all or a portion of. The business financials allow us to determine most importantly if the business is sustainable going forward. They also allow us to see if you have any non-cash expenses we may be able to “add-back” into your verifiable income which will help you to qualify for a higher mortgage amount.
- Proof of Self-Employment: You will be asked to confirm your self-employment status and there are numerous acceptable documents to do so, including:
– Articles of incorporation for your business
– Business license
– GST return
– Talk to your favorite mortgage professional about alternative self-employed status confirmation documents
- Tax Returns or T1 Generals: These detailed personal income tax documents can be used to confirm the self-employment earnings and expenses of a sole proprietor as well as to determine what other types of income you earn and pay taxes on in addition to employment income.
- Personal and/or business bank statements: Some lenders request 3, 6 or even 12 months bank statements to confirm reasonability of the income stated on the application as they want to see the deposits going into your accounts.
Qualifying for a mortgage when you’re self-employed can be tough though you can make the process a bit easier on yourself by working with a mortgage professional who has experience in obtaining mortgage approvals for self-employed borrowers. Since these types of products have guidelines that vary depending on your type of self-employment and how long you’ve been in the business, it is imperative that the person you choose to work with knows what options you are eligible for. Stay on top by picking a mortgage solution that is affordable for you!