If you are self-employed, don’t despair you can still qualify for a mortgage! But there are a few things you need to be aware of as self-employed income is a little trickier than regular salaried employment however it doesn’t mean you won’t qualify. The one thing is that you will need to provide is more documentation depending on whether you are a sole proprietor, partnership or incorporated. Ideally, most Lenders would like to see the following:
- At least 2 years of self employed income. You will need to provide the most current 2 years T1Generals with statement of business activities backed by current Notice of Assessment, Audited Financial Statements prepared by Arm’s length 3rd party, GST # and/or Business license.
- At least 2 years established; Most current 2 years Audited Financial Statements prepared and signed by CA; T4 from Corporation and recent NOA, Articles of Incorporation.
- With self-employed income or when in commission sales we tend to write down our income by using as many write offs as we can. The best way to plan is to write off fewer expenses than you normally would in the two years leading up to your purchase. Unfortunately, this means you will pay more personal taxes however, your income will be higher which will help to qualify you for the mortgage amount that you are looking for. Keep in mind that a lender will allow certain add backs such as business use of home, capital cost allowance, etc. or for your income to be grossed up 15%.
- STATED INCOME; This could be an option for those that have been in a same Profession for at least two years prior to becoming self-employed or have self-employed business for 2 yrs (non commissioned unfortunately). You must be able to verify that you have experience working in the same field for a minimum of 2 years. This can include working as a non-self employed worker in the same field or profession. There are options with some lenders to state your income. The lender will look at the industry and they research the average income of someone in that same profession within a reasonable amount of time. Stated Income can be tricky and is a different way of showing your income but your Mortgage Broker will know the questions to ask and how to establish this proof of income. For those in a 2 year business, the stated income should be reasonable based on the length of operation, type and size of the business. Documents such as your bank statements, showing consistent deposits, will be requested by the lender. Keep in mind with stated income you will need a minimum of 10% down if you’re buying a home and if refinancing you will only be able to access up to 85% of the value of your home
- If you don’t have the 2 year history and don’t qualify under stated income you could also look at a shorter term option providing you have 20% down payment. There are Alternate Lenders available that will look at and average of your current year to date income. Rates are typically higher and there are some extra associated however it would be a short-term solution until you qualify with a traditional lender. This is a good option for commission based employment and you need to have a minimum of 3 months on job.
Some TIPS for self-employed income;
- Be careful that you aren’t going on some extended holiday within the two years prior to purchasing as this won’t help your two-year average income. Instead take all the time off that you need after. Make sure you plan your timeline with income in mind.
- Good credit will establish your worthiness of obtaining the mortgage so work at keeping your credit score as high as possible.
- The higher the down payment the better as it’s less risk to the Lender and shows ability to save plus also shows them you have an emergency fund.
- Make sure your tax returns are up to date and file your taxes on time. In addition, pay any taxes owing to CRA. You will need these documents and Lenders need to see you are caught up on those taxes.
- Keep your debts as low as possible – less debt owing looks better to the lender, you will qualify for more and it can improve your credit score.
- Be willing to provide the proper documentation. Fully document your income through previous years’ tax returns, profit and loss statements, balance sheets.
If you are thinking of seeing a professional about a mortgage, the first step is to have your documentation together ahead of time before meeting with them. This will ensure the process is a little more seamless because if documents are missing it makes it difficult to establish your qualifying income. Give me a call today with any questions you may have!