When you’ve worked hard to build your business, it’s your passion and your dream, but sometimes working for yourself means you’re facing obstacles in securing lending than those who work for a company wouldn’t face.
Sometimes, one of the hardest things about being self-employed is getting a mortgage to own your own home, but there are options for those who own their own business and want to purchase a house.
Our brokerage has worked with many self-employed clients to secure financing for a mortgage, and today they live in their dream home with their families.
What do you need to qualify for a self-employed mortgage?
The hardest part of getting a mortgage when you own your own business is proving your income. If you work for a bigger company, it is far easier to prove that you have a stable income because you have consistent paycheques coming in.
When you’re self-employed, many lenders will look for about 2 or 3 years worth of stable income included in your mortgage application to be considered. When you have this kind of history for income, we can help you access almost all of the same mortgage products that everyone else has access to. This includes lower interest rates and the same down payment amounts.
If you don’t have that kind of income history, it’s ok – you can still purchase a home; it’s not impossible. For those who may have a newer business, you can still qualify for a self-employed mortgage with a good credit history and a 10% down payment instead of the 5% most applicants would need.
Why is it harder to get a mortgage when you are self-employed?
There are a number of reasons why someone who owns their own business might have trouble getting a mortgage – particularly with a more traditional lender such as a bank or credit union. For starters – as an entrepreneur, it is likely that your income fluctuates, unlike that of a T4 employee.
Another reason is that as someone self-employed, you have the benefit of a number of tax deductions that other people don’t. And while this can be a great benefit in terms of lowering your tax burden and helping with cash flow, it lowers your income – at least on paper.
That’s why our firm works with a number of lenders who specialize in self-employed mortgages. And they look at more than just your Notice of Assessment when determining your eligibility for a mortgage.
How do you prove your income?
When working with our brokerage, one of our agents will help you navigate through all the documents you need to ensure you will secure financing, and there won’t be any issues meeting the conditions of the offer you submitted.
To give you an idea of what you’ll need, you can prepare these documents for your initial meeting, so we have somewhere to start:
- The financial statements of your business
- Proof that your GST and/or HST is paid in full
- Any contracts you have in place, signed, with your clients showing projected future income
- The credit score for your business, and your personal credit score (if you have it)
- Documentation showing that you are owner of your business
- Proof that you have your down payment of your own funds, and it is not a gift from someone else
There are two main tools that lenders can use when determining your income for your eligibility for a self-employed mortgage. These are your Notice of Assessment and your bank statements.
Your Notice of Assessment will show how much income you’ve made after any tax deductions have been made. If you have been in business for some time and you are earning a decent income, this may be all that is needed to qualify you for a self-employed mortgage.
If, like many business owners, however, your income after tax deductions is low, you may need to use the second tool, which is your bank statements. Using your bank statements makes it easier for a lender to see how much money you are bringing in. So if you have a lot of tax deductions, this may be the better way to determine your eligibility for a self-employed mortgage.
Can you still get an insured mortgage?
When you get a mortgage as a self-employed person, you can still qualify for an insured mortgage just as anyone else would. For any down payment that is under 20% of the purchase price of your home, you will still need to have an insured mortgage through CMHC or similar. It is only if you have more than 20% down payment, this would not apply for you, regardless of whether you are self-employed.
What can I do to increase my chances of being approved for a self-employed mortgage?
If you have concerns that a lender may not approve you for a self-employed mortgage, there are things that you can do to help improve your chances. The more information that you can provide your mortgage broker with, the more that they can do to help you.
Here are a few things you can do to increase the chances that you will be approved for a self-employed mortgage:
1. Work on your credit score
While it is certainly possible to get a self-employed mortgage without a perfect credit score, the fact is that having a good score will only improve your chances. Additionally, when you have a better credit score, you will usually be able to qualify for a better interest rate.
The issue with many business owners, is that they often take on a lot of personal debt to get their businesses off the ground.
Now having debt is not unusual for businesses – particularly businesses in the early stages of development. But problems can occur if you are late with or miss your payments, as this can cause your credit score to go down.
Not only is it important to make sure that you are making at least the minimum payments on time, it is important that you give your lender a credit history to look at. Having several lines of credit such as a car loan, credit card etc. will help to show that you are reliable for making your payments. Developing these good credit habits for a few years before you apply for your mortgage can really help to improve your chances of getting approved.
2. Save for a higher down payment
Most lenders will have a minimum down payment that they will want you to be able to make on a home before they approve you for a mortgage. But if you can save a higher amount, it could be better for you.
By making a higher down payment, the lender will see the self-employed mortgage as less risky for them. Since you have more invested in your home and therefore have more equity in your home, it becomes less likely that you would give up your home should you find yourself in a difficult financial situation.
Besides that, the more you can put down on your home now, the more manageable your mortgage payments will be.
If you are able to qualify for a self-employed mortgage with your Notice of Assessment, you will likely have to put 10% down. If you are relying on your bank statements in order to qualify, then you will likely be required to put 20% down.
3. Have a low debt to income ratio
Although it’s important to have a credit history, too much debt can be a bad thing. Lenders want to know that you can handle the amount of debt that you have as well as be able to make your mortgage payments.
4. Have a history of self-employment
The longer you have been running your business and making a living from it, the more stable potential lenders will see you as. This is also true of T4 employees – it is much easier for them to get a mortgage when they have been at the same job for several years than if they have recently switched employers.
If you are applying for a self-employed mortgage, it is recommended that you be operating your business for at least two years before you apply. In some cases, a lender may make an exception depending on your down payment and other factors.
5. Keep accurate records
The more information that you can provide your mortgage broker and lender when you are applying for a self-employed mortgage, the better.
There are more considerations that lenders must make when deciding whether to approve a self-employed mortgage, so it’s important to have all the necessary financial information at hand and organized so that you can access it quickly when requested.
Can I still get a self-employed mortgage if I have bad credit?
While having good credit is an important factor in determining whether you’ll qualify for getting a mortgage, it is not the only factor. If you have less than perfect credit, it may still be possible to get a self-employed mortgage.
Here are a few other factors that lenders will look at if an applicant for a self-employed mortgage has bad credit.
- The amount the applicant for a down payment. The higher the down payment, the better.
- Debt to income ratio.
- Other properties or assets that the applicant may own.
If the application is strong in these other areas, the lender may overlook the fact that the applicant has a weak credit score.
If you are concerned that your debt to income ratio may be too high, then speak to your mortgage broker. There are a variety of alternative and private lenders that may be able to help. Your mortgage broker will have connections with these lenders and can help to match you to the lender most appropriate for your circumstances.
Advantages of working with a mortgage broker to get a self-employed mortgage
There are many reasons why it is recommended that you work with a mortgage broker when trying to get approval for a self-employed mortgage. Some of them are as follows:
- Access to specialty lenders – not all lenders will offer self-employed mortgages. Mortgage brokers have access to a wide range of lenders, many of whom specialize in self-employed mortgages.
- Lower interest rates – because mortgage brokers work with many different lenders, they can shop around on your behalf to help you find the best interest rate possible for your situation.
- Only one credit check – If you were to try shopping around with different lenders on your own, each one would have to run a credit check in order to give you a quote. These multiple credit checks could temporarily damage your credit and make it even harder for you to qualify for a mortgage. A mortgage broker can run one credit check and then use that one to get multiple different quotes.
- Expert help – Getting approved for a self-employed mortgage is often more complicated than it is with traditional mortgages. Your mortgage broker will let you know all the financial information that you will need to gather and answer any questions you may have about the application or the process.
- Can assist with other products – in addition to getting a first self-employed mortgage, there may come a time when you wish to refinance your mortgage or get a second mortgage. Your mortgage broker is best equipped to advise you on these products and help you get the right financing.
Why work with us?
We have access to an extensive network of lenders, many of whom specialize in self-employed mortgages. While you could shop for rates on your own, you will be missing out on many opportunities since some of the lenders that we work with will only work through a broker.
Our brokerage has an extensive amount of experience navigating the world of mortgages – even the ones that are complicated. We have worked with numerous clients who are self-employed and have been able to get them the funding they needed to purchase their home.
If you are looking for the best rate and terms for your self-employed mortgage, we can help make that happen. Contact us today!
Self Employed Mortgage FAQ's
Not necessarily – everyone’s situation is unique and so I will work with you to find the solution that works best for you. There are many families who are in this circumstance who have purchased a home. Give us a call today to determine your options!
There are mortgage options for almost everyone, so we will use our experience and connections with lenders to make sure we find an option for you. We will go through the documents needed with you and organize all of it so you are able to qualify for a mortgage.
When we are meeting to discuss your mortgage, we will go over all the documents you need and if there is something you don’t have we can help you determine how to get it and when you will need it. There are certain documents your lending company will need, so if you don’t have those we will need to find a way to get them before proceeding. We am here to help, so if you have questions or don’t have a document we will find a way to get it!