Talking more about self-employed mortgages.
“Entrepreneurship” has a certain ring to it. The idea of being your own boss and creating your own schedule sounds appealing. You can finally break free from the shackles of the regular 9-5. While your friends are busy climbing the corporate ladder, you can retain a sense of fulfillment knowing you steer your own destiny. If your business does take off, you have the potential to earn more than you ever could be employed by someone else.
This mental shift has taken over the mindset of Canadians. More of them are seeking to leave their conventional jobs and start their own journey as a business owner. The percentage of self-employment has risen to 15% of Canada’s labour force.
Although there are lots of perks that come with self-employment, it’s not always sunshine and rainbows. This leads us into the conversation about what you should know about self-employed mortgages.
Getting approved for self-employed mortgages isn’t impossible, but it’s comparatively difficult. Let’s dive into the factors of why your mortgage application could be against your favour if you own a business.
Proof of income
Like traditional employment, self-employed mortgages require you to show proof of income.
Unlike T4 employees who work under an employer and have a steady paycheck every month, self-employed individuals pay themselves. There isn’t always a steady flow of income every month. You may have to pay every employee working for you before you can reap the profits of your business.
In cases of start-ups, you may take years to break even. Sometimes you have to invest your earnings back into your business for better traction. This makes it difficult for the lender to trust they’ll get their money back.
One of the perks of operating a business is that you can use your business expenses to reduce your taxable income. The downside to this is that it doesn’t work in the interest of your mortgage application. It makes your lender wonder if you’re making enough for yourself in the first place.
Also, statistics show that nine out of ten businesses fail. Do you see why they would view you as a liability?
When going through the pre-approval process for a self-employed mortgage, you need to provide additional documentation.
It’s easy to provide documents when you’re applying for a regular mortgage. Your credit score, letter of employment, pay stubs and a few other requirements may suffice. But when you’re self-employed, there is a whole other set of documentation that needs to be unearthed to assure the lender they won’t lose any money.
Some of the extra documents to be verified by the lender are:
- Two years of personal tax returns
- Two years of Notice of Assessments
- If stated income, up to a year’s worth of bank statements to justify income
These documents vary as there are many types of self-employment.
What’s the process to apply for a self-employed mortgage?
The process for self-employed mortgages may be long, but not difficult if you follow the correct process. Here are a few steps to follow that can help you secure a self-employed mortgage:
Work with a trusted mortgage broker
While you’re busy handling the reins of your business, your mortgage broker would be your best bet in maneuvering the mortgage situation to your favour. As a self-employed individual, you have to disclose your financial standing of both yourself and your business. Hire a professional – a trustworthy broker who specializes in working with business owners to make this process efficient.
Clear your business debt
If you’ve taken out a loan for your business, try to clear as much of that debt as possible before you take out another loan for your mortgage. Keep your business credit score as high as possible, and know your debt-to-income ratio.
Prep your documents
Keep yourself briefed about all the documentation needed before you start the process. Procuring the right documents at the last minute might just cause panic. When time is of the essence in getting the property you have your eye on, equip yourself with the documents beforehand.
Applying for a self-employed mortgage may require you to submit documents that you never knew you had to. Let your broker guide you through it. In addition to your broker, you can also hire a skilled accountant to help you sort all the paperwork.
Like they say – If you stay ready, you don’t have to get ready.
If you’re trying to apply for a self-employed mortgage and do not meet the required criteria, don’t be disheartened. It’s not the end of the world as third-party lenders are always an option available to you.
Although alternative lending has higher fees and rates, it could be a great option for those who do not qualify with a normal bank lender. It requires you to put 20-35% down and funds are provided outside of traditional banking institutions.
A stated income mortgage is also an option where the lender understands that you can’t prove your taxable income. Like the name suggests, stated income mortgage is taken at face value, where you simply ‘state’ the income on the application and put as little as 10% down.
It’s not always smooth-sailing when applying for a self-employed mortgage. You face a different set of hurdles, but if you come prepared and use the tips above, you’ll be on your way to getting approval for a self-employed mortgage in no time.