Getting a mortgage isn’t easy
This week, I want to outline what to expect from the mortgage process when you’re applying as a self-employed borrower and what you should be prepared for. If you are self-employed, gather together ALL of your income documentation before your meeting for a mortgage approval, this will most likely be a minimum of last 2 years of both personal and corporate documents. If you haven’t been self-employed for 2 years I suggest you speak with an independent Mortgage Broker versus your banker as this type of employment comes with very different income confirmation requirements than for a borrower who is an employee for a company, with no ownership in that company.
You’re considered a self-employed borrower if one or more of the below apply to you;
- You own your own business, either incorporated or sole proprietor or partner
- You are responsible for the payment of your own personal income taxes
- You work under contract with your employer and they do not deduct income taxes from your pay
One of the most important components of a mortgage application is the qualifying income, or the borrower’s ability to repay the loan. If you’re self-employed, there are 2 types of qualifying income that are acceptable. “Verifiable income”, which means you qualify using the income you report to the government and pay taxes on; confirmable by providing your most recent 2 years tax filings. The second is “stated income”; this allows you to state your income at a reasonable level for your occupation and time in the industry without having to “prove it on paper”.
Being self-employed can allow a person to write off expenses related to the operation of their business in order to lower their personal income and as a result pay less personal income tax. A “stated income” mortgage product will cater to this type of borrower, but because income is not being confirmed by acknowledgement from Revenue Canada, the minimum qualifying requirements for credit score and down payment source and amount are different.
If you’re qualifying under a “stated income” program, you are required to have at least a 10% down payment and if you have less than a 20% downpayment, your credit score and history must be very strong in order to be eligible for approval under “insured” self-employed mortgage programs at best rates. Do be aware other options are available with alternative lenders with more down payment and higher rates where the document and credit requirements are more relaxed.
As far as downpayment is concerned, the requirements vary depending on what type of lender you’re going through. If you’re applying for a stated income insured mortgage product with best rates, you must have at least 10% of the purchase price available from your own funds to use for downpayment. You can use a home equity line of credit, but cannot use any unsecured borrowings or gifted funds unless it’s above the 10% from your own assets. When taking the alternative lender route, there are more flexible downpayment options available, including seller financing, gifted funds, borrowed funds, or a combination of all of them. Again, be aware when going through an alternative lender under a “stated income” program, the rates are slightly higher than best interest rates and there is also the possibility of being charged a lender fee. Talk to your mortgage professional about some preliminary cost quotes with the alternative lenders so you will know what to expect.
When it comes to the other paperwork you could be asked to provide, required documentation will vary depending on your employment status and lender conditions. All lenders will request proof that you are self-employed or under contract. As the documents requested will be specific to your business, discuss with your mortgage professional what confirmation of self-employment you can provide that would be acceptable to a lender. Some possibilities include: articles of incorporation, business license, or T1 generals showing statement of business related expenses. For the qualifying income conditions, if you’re applying with verifiable income, you will likely be asked to provide at least 2 years Notice of Assessments and/or full personal income tax returns showing your average earnings. If you’re “stating” your income, you could be asked for a self-declared income letter or bank statements showing income deposits, among other documentation.
With regards to credit requirements, the better your credit is, the more appealing your application is to a lender. A good credit score does not exempt you from providing documentation, though it does help ensure you’re getting maximum lender access and competitive interest rates.
Don’t limit your options, use a mortgage professional that has access to many lenders, which translates to many product offerings for you. If your mortgage has to be insured, make sure you have access to a lender that uses all 3 mortgage insurance companies. If you don’t require an insured mortgage due to a larger downpayment, it’s even more important to use a mortgage professional who has access to multiple options, which translates to a higher chance of approval for you. Don’t be afraid to ask your mortgage professional what kind of lender access they have and also if they have experience in self-employed mortgages. That experience could be the key to structuring your application to produce a favorable outcome.
I can’t cover all the fine print of our self-employed mortgage products, so be prepared for in-depth questions about your business, assets and finances. Full disclosure is ideal as it will help your mortgage professional place you with a lender whose requirements you meet and whose terms are appealing to you too.