Getting a mortgage when you are self-employed is different than applying when you are considered to be an employee. I suggest being prepared for the process by addressing some of the items below before you start looking for financing. Keep reading for the step-by-step guide to financing for borrowers who are business-for-self;
Step One: Confirm your employment status
You’re considered to be a self-employed borrower if one or more of the items below apply to you;
- You own your own business, either incorporated, 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
Your potential lender will want to know how you operate your business. Do you work under a business name that is incorporated or limited and are you paid through your business and then paid personally from that business? Or are you a sole proprietor where you declare your business’ earnings under your personal name and operate under your personal name or a trade name? This is important to know before you start filling out mortgage application forms. If you’re not sure, the next step will enable you to determine your employment status in a hurry.
Step Two: Gather together ALL of your income documentation before your meeting with a mortgage professional.
This will most likely be a minimum of your last 2 years personal and corporate income tax documents. If you haven’t been self-employed for 2 years or have not yet completed your annual taxes, I suggest a preliminary conversation with an independent mortgage professional to discuss acceptable documentation for you. As I mentioned already, this type of employment comes with very different income confirmation requirements than for a borrower who is considered to be an employee.
Step Three: Determine your qualifying income
I believe the most important component of a mortgage application is the qualifying income and the borrower’s ability to repay that mortgage. If you are self-employed, there are 2 types of qualifying income that are acceptable. “Verifiable income” which means you can 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” and 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, though as income is not being confirmed by acknowledgement from Revenue Canada, the minimum qualifying requirements for credit score and downpayment source and amount are different.
If you’re qualifying under a “stated income” program, you are required to have at least a 10% downpayment. 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.
Step Four: Line up your downpayment
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 should have at least 5% of the purchase price available from your own funds while a gift from family can be used for the other 5% for a total of 10% downpayment.
When taking the alternative lender route, there are more flexible downpayment options available as you can choose from: 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 you will be required to put in 15% downpayment. Talk to your mortgage professional about some preliminary cost quotes with the alternative lenders so you will know what to expect.
Step Five: Submit your paperwork
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.
Step Six: Be prepared for the rest
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. If you have bruised credit, you can still get a mortgage while self-employed though be prepared to provide a larger downpayment, pay higher than best rates and potentially be charged an upfront fee. Ideally that will be short term until you can improve your credit and move to a lower interest rate lender.
Make it easy on yourself and don’t limit your options, use a mortgage professional who has access to many lenders that translates to many product offerings for you. 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.