Here are your chances of getting a mortgage approval
My first question to determine if a borrower is self-employed is; how are your personal income taxes paid, by your employer or by yourself? If your taxes are collected and paid by your employer on your behalf, you are considered to be an employee. If you are responsible for making personal income tax payments yourself, you are viewed by mortgage lenders as being self-employed, whether you’re a sole proprietor or have an incorporated company or partnership. The exception is if you own all or a portion of the company you work for and T4 yourself, then technically your employer pays your taxes, though you are still considered to be self-employed.
Once I have confirmed your employment status as self-employed, I fit the borrower into 3 basic approval categories; extremely likely, more than likely, and challenging but still likely. While there are always exceptions, it can be used as a rough guide to determine how easy or difficult mortgage qualifying is going to be for you.
- You have great credit, a credit score of 680 or higher with at least 2 years history of repayment.
- You are up to date with your personal income taxes and can easily provide a recent Notice of Assessment confirming this.
- You have been self-employed for at least two years and your last 2 years tax returns and corresponding Notice of Assessments show sufficient net income to qualify for the mortgage amount you require.
- You have at least a 5% -10% downpayment
- You have a positive net worth as your assets,not including the downpayment, exceed your debts.
More than likely
While you may have good credit, you haven’t been self-employed for a full two years and don’t have 2 years of filed self-employment tax returns. Don’t worry, there are still options available if you can meet the below criteria;
- Your credit score is higher than 600
- You are making money from your business and you have bank statements to confirm.
- You have at least a 15% downpayment, potentially more as there is some flexibility on the source of that downpayment as long as you have the documents to support it.
- The property being financed is in good condition and in a desirable location.
- You don’t mind paying slightly higher rates in exchange for relaxed qualifying guidelines
Challenging but still likely
Working for yourself should not impede your chances of home ownership. Regardless of your credit and how long you’ve been self-employed, there is likely a lender match for you. While most large lenders have minimum criteria that every borrower must meet, there is a category of alternative and private lenders where you may fit. If you’ve been told no, don’t give up if you can check the items below:
- Your credit isn’t the best; you may have had a previous bankruptcy or a consumer proposal, or you have unpaid collections or judgments. You have a good reason for the derogatory credit, which is now in the past and you have significant funds available for downpayment.
- Your income may be hard to prove by traditional methods, but you can show the lender what you earn and how you are going to make your mortgage payments.
- You have downpayment options of at least 25-30% of the purchase price. It may not all be from your own resources as only a portion of it might have been saved while the remainder may be borrowed. If you are refinancing a home you already own, you only need a mortgage amount not totalling more than 75% of your home’s value.
- Your property is in reasonable condition and ideally is located in a marketable area such as a major city centre or somewhere close to a city centre.
- You are prepared to pay higher interest rates and make a larger downpayment, or have significant equity in your home in the case of a refinance. You do know there will likely be an upfront fee. You understand that as long as the payments are affordable and your new mortgage meets your financial goals, alternative or private mortgage financing may be the solution you’re looking for.
Deciding if home ownership is right for you at this time in your life is not easy if you have had some past challenges with income or credit, a mortgage is a pretty big commitment. If you are set on moving forward with the idea, increase your chances of a positive answer by working with a mortgage specialist who has experience working with business owners and self- employed borrowers.