Self-employed and looking for mortgage options? Let’s say you’re in the market for a new house, and after months and months of searching, you’ve finally landed on your dream choice. Problem is, you’ll need to get a mortgage to pay for it.
And since you’re self-employed, lenders see you as a financial risk and are hesitant to give you the loan you need. Being self-employed means that you aren’t guaranteed a paycheck, at least in the bank’s eyes. Banks will even show this hesitation for people on maternity leave, disability, etc.
If this is your situation, what can you do?
Well, we’re glad you asked. It’s time to take a look at all of your self-employed mortgage options!
But enough preamble, right? Let’s jump right into the thick of it!
Self-Employed Mortgage in Canada
The main reason self-employed individuals are seen as financial liabilities by banks is due to the fact that their net income (what they make after taxes/costs/etc.) functions differently from conventional workers. When a worker with a desk job submits their tax return, their company takes off the taxes and other fees and gives banks a clear picture of their income.
If you’re self-employed, however, you have to factor in portions of your gross income (what you make before taxes) towards business expenses, something salaried workers don’t have to worry about.
The constant state of flux the income of business owners are under due to your income deriving entirely from their business performance doesn’t help matters. As a result, even if someone’s making enough money to qualify under normal circumstances, one misstep could paint you as a financial risk for a bank.
How Can a Self-Employed Person Get a Mortgage in Canada?
If you plan on getting a mortgage from one of the big banks and you are self-employed you’ll need to get your documents in order. For example, having your credit score sit around 700 or higher gives a good impression to banks that you have the financial responsibility to be trusted with mortgage financing.
You’ll also want to have documented proof dating back several years that you’ve paid your personal and business taxes on time. Banks generally want to see your last two years of notices of assessment. This way they know your taxes are up to date and there is likely less chance that you will be audited down the road.
You should also line up other financial documentation like the credit card statements for your self-employed business and your monthly bank statements. Any credit references you can scrounge up will also prove useful here.
If it all looks good, you have a solid shot to obtain a mortgage through one of the big banks. First, the lender will look to see if your net income meets the benchmark for their loan giving. If it does, they will look at your net income from the past two years and see if the income has grown, shrunk, or stayed the same.
Your lender may even ask to see documentation showing your self-employed business will continue to grow or that there exist sensible data projecting growth in the coming years. In fact, the amount of documentation big banks can require is seemingly endless. Truth be told, there are less painful options and a stated income mortgage is one of them. This is one of the best choices when looking for self-employed mortgage options.
Need Another Option? Try Stated Income Mortgages
If the standard method fails, try applying for a mortgage with a stated income. This is where a mortgage broker can come in super handy. Mortgage brokers have access to lenders who offer stated-income mortgage approvals.
The best part about stated income mortgages is that the rates and terms are very consistent with what the big banks offer. There is simply more flexibility and options when you work with a mortgage broker.
A stated income mortgage is where the lender looks at your gross and net incomes and lets you borrow money based on a common-sense lending approach. In fact, the larger your down payment is or the more equity you have, the easier the process is and the less scrutiny you will face.
For example, a client who owes 100k on a home valued at 400k and is looking to borrow $100k will face less scrutiny than a self-employed borrower who is trying to put 10% down on a 400k house. The reasons are painfully obvious. In the first scenario, there is little risk to the lender as the client would have $200k in equity.
If you are self-employed and purchasing a home with less than 20% down you will be required to have your mortgage loan insured by the Canada Mortgage and Housing Corporation. Again, the more you have as a down payment or the more equity you have, the fewer hurdles you will have to jump through.
Working with an experienced mortgage broker can simplify and streamline the process. In addition, you’ll have access to a wider array of self-employed mortgage lenders and products to ensure you are getting the best approval you are eligible for.
Who Is the Best Mortgage Lender for Self-Employed People?
If you’re looking for someone to explore these options with (or find another option altogether), which lender should you use?
Well, private lenders are an option if you need a loan quickly and don’t have the income or credit score to back it up. The downside is that private lenders offer higher interest rates.
Alternative lenders are another option. They charge more than their “normal” counterparts but don’t require all the fancy documentation to get you a loan. While rates are moderately higher, they are a better option than private mortgage financing.
Credit unions exist as a possible avenue too. Mortgage brokers have access to many different mortgage financing channels. This is what makes them so versatile. Just make sure they are knowledgeable and understand the ins and outs of stated-income mortgages
A professional mortgage broker can simplify the entire process. And, save you a lot of time, and money and help you avoid potential mistakes. Mortgage brokers don’t lend money. Instead, they review your financial history and status and pair you with a lender that meets your needs.
A good mortgage broker can make short work of navigating the world of self-employed mortgages. With more options and flexibility than the traditional big banks.
A Successful Future
And there you have it! Now that you know all about your self-employed mortgage options, you’re ready to pursue your dreams! Have questions? Give us a call toll-free at 1-855-668-3074 or jump right in and apply now!