Mortgage Strategy for the Self-Employed
When you are self-employed, it’s sometimes hard to prove your income when applying for a mortgage. Things that work for you in your business, like tax write-offs, can work against you when it comes time to ask a bank for a loan.
Tips for starting the process:
Get your documents ready.
Have at least two years’ worth of tax returns and financials, your Notice of Assessments and T1 Generals, Articles of Incorporation, or business licence. Tax returns and financial documents are essential in determining which lenders and products will be available to you. It is also helpful to have bank statements, which could help convey to the lender that you have a steady income.
Pay your taxes.
It is also important that all self-employed workers seeking a mortgage are current on their income and sales tax returns. If you have fallen behind or you still owe for previous years’ taxes, it can affect your ability to qualify for the right mortgage.
Provide detailed information about your business.
Information like industry type and profession, business type (sole proprietor, partnership, or incorporated and percentage of ownership), is there a cash component to your business? Any steps a self-employed or business owner can take to convey they have steady and stability in their income will help in the mortgage qualification process. As such, the more informative you can be about your business, the better. Income, expenses, business milestones, break even points – information like this can improve your chances of qualifying for the mortgage you want.
Lenders have options for several types of self-employed clients:
Income Qualified Self-Employed
Standard mortgage with as little as 5% down payment. Income Qualified on the two-year average of claimed income.
Alt A or Stated Income
Insured mortgage with as little as 10% down payment. Income is grossed up or considered “reasonable” for the industry and profession based on scale, viability of the business, and forward earning potential. Income is considered realistic given the type of business, experience, and ability of the borrower. The credit profile is clean and indicative of income capacity and the structure and nature of the business is considered (ex. is there a large cash component for this type of business?).
Solutions for borrowers who cannot provide income documentation in the traditional manner but have 20% down payment are available at slightly higher rates that offset the risk to the lender associated with not having verifiable traditional income. Or perhaps your credit has been affected by fluctuating income and you need to restructure – we can help and provide several alternative solutions.
Solutions for borrowers with non-traditional income documentation, elevated debt ratios, or previous credit impairment. Higher rates and fees may be applicable and usually good short-term fixes to get you back on track and headed back into one of the above options.