Self Employed Overview
If you’re self-employed and want to get a mortgage, you may find yourself lost in the whole process.
There are many articles out there describing the application process for a mortgage, but most of them talk about a mortgage for individuals who are employed in a company, not self-employed.
Considering the fact that back in 2018, 15% of working Canadians were self-employed, it’s necessary to explain what the mortgage application process is like and how everything works.
The mortgage for self-employed changed after the market crash in 2008. It’s no longer as simple as showing your tax returns and personal identification documents.
The process is now more complex with stricter rules in place and more documents required to apply.
The Problem With Self-Employed Mortgages
Applying for a mortgage as a self-employed person is complicated because it’s sometimes challenging to prove the amount of income you earn.
This is because business owners tend to show the maximum amount of business expenses in an effort to minimize the tax they pay, so it’s difficult for mortgage lenders to get a grasp or the real income.
On the flip side, there are some self-employed people who want to present a higher income to get a mortgage loan easier which also makes it difficult for lenders to assess their creditworthiness.
This is all legal and allowed but will harm the mortgage received in the long run. Yes, they will be approved for a mortgage, but will they be able to keep up with the regular payments for it?
The regulations are set in place not only to protect the mortgage lenders but also the mortgage receivers, so it’s important to present a realistic image of your current financial situation.
It’s something that Dominion Lending Centres specialises in (more on Dominion Lending here)
The 2012 Model
To avoid presenting a wrong image of what your finances are as a self-employed person, the regulations from 2012 require you to present as high of an income as you can.
It’s planned like this to avoid both overstating or understating the real income you earn.
The total income you earn throughout the year will either be paid as tax or remain as debt to be paid later on.
You can simply use your stated income, but you would be required to put a downpayment of at least 35% so you don’t have to get mortgage insurance.
This is why the plan of 2012 is better for both parties – the lender and the borrower.
The documents required of you in the application will allow the lender to assess your financial position easier and with it, give you a mortgage that is more suitable for your current finances.
To help the lender give you the right rate, your mortgage application should contain the following:
- Last 2 years of Notice of Assessments (NOAs) showing no tax arrears
- No previous bankruptcy or out of bankruptcy for a year with re-established credit
- Tax returns showing steady income for the past 2 years
- Documentation showing self-employment for the past 2 years – this is commonly a confusing point for many. Documents showing your self-employment are a business plan for your company, your business’ website, as well as expenses and income from the business accounts.
Some lenders allow you to take part of your business expenses and put them towards your stated income.
This will help you lower your ratios and get closer to the required 35% downpayment, so make sure you get informed about your options when it comes to this as well.
If you’ve owned your business for less than 2 years and are unable to provide 2 years of tax returns or NOAs, there is no need for concern.
There are still lenders out there that offer mortgage loans for business owners or individuals who have been self-employed for less than 2 years.
There are options for all kinds for self-employed individuals and business owners, so make sure to explore your options when you’re looking for a mortgage.
It can be difficult to assess for yourself which lenders can give you the best mortgage rates for self-employed and more favorable terms, so using a mortgage broker can be beneficial.
A qualified mortgage broker from your area will know which banks and financial institutions offer the best mortgage rates for self-employed and will be able to recommend one to you. They will also guide you through the process and share their knowledge with you, which will ultimately help you make a better, more informed decision.
We are dedicated to giving you the most helpful mortgage advice and giving you the best mortgage service, no matter what your needs are.
As mortgage agents who specialize in [reference the article mortgage type], you can be sure that we have the solution for you that will take away all of the stress and get the best mortgage product for you.
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