How to get a mortgage when self-employed: A complete guide
Owning your own business shouldn’t keep you from owning your own home. But freelancers, independent contractors, sole proprietors, and other self-employed workers do have unique considerations to keep in mind when qualifying for a mortgage. Here are the key questions to consider that will allow you to navigate the process with confidence.
Can you qualify for a mortgage while self-employed?
Getting a mortgage when you run your own business is certainly possible. However, your income will be scrutinized more closely than if you were a salaried employee with another company. Most lenders will want you to provide information tied to your previous two years of self-employment history. If you’ve been self-employed for less than two years, qualifying is more complicated and may require you to look for alternative lending options.
How do lenders evaluate self-employment income?
While gross income shows your total revenue, lenders will usually focus on net income after business expenses. More specifically, they’re looking for at least two years of stable and taxable net income.
What essential documentation is needed to secure a mortgage?
- Tax returns and financial statements
Lenders will need your T1 general tax returns. Financial statements, such as bank statements, will speak to your cash flow.
- Employment and business verification
Proof of self-employment can include articles of incorporation, a business licence, past and future work contracts, and more.
- Income and asset documentation
You’ll need your notice of assessment from the Canada Revenue Agency for the past two years, as it tracks your income and what you’ve paid in taxes. Self-employed individuals may have multiple sources of income, including dividends, capital gains, and earnings from different investments. Clearly presenting relevant documentation to mortgage lenders is essential.
What are some tips to improve your chances of approval?
There are several ways to up your odds of getting a mortgage. These include:
- Having a good debt-to-income ratio (DTI) and credit score, which demonstrate that you repay debts and use credit responsibly.
Read this article to find 8 tips to improve your credit score.
- Keeping your business and personal accounts separate, making it easy for lenders to identify and analyze your finances.
- Coming prepared, ready to provide your income details, monthly credit card and loan payments, outstanding balances, concerns regarding your credit report, and more.
- Going the extra distance – putting a larger down payment than necessary or getting a co-signer can help assuage any concerns lenders might have about your risk as a client.
What are some of the common challenges faced by self-employed borrowers?
Different documentation is required
One of the biggest challenges self-employed people run into when applying for a mortgage is their financial statements. Because those documents differ from the ones of incorporated companies, it can be more difficult for lenders to assess net worth and borrowing capacity.
How to overcome the challenge: Staying organized and knowing precisely which documents are needed will help make your case.
Tax efficiency can create problems
In a bid to maximize tax efficiency, accountants may advise self‑employed individuals on which legitimate business expenses can be claimed under tax rules. When a bank evaluates the income of a self‑employed applicant, it typically reviews expenses and investments to develop a complete understanding of the individual’s financial situation. Some self‑employed borrowers may hesitate to share this information, often due to a misconception that banks are connected to government or tax authorities.
How to overcome the challenge: Full disclosure to lenders is more likely to help your case than harm it. Self-employed borrowers should think strategically about the big picture rather than focus on trying to save on taxes. How they declare net income and which expenses they claim will matter when applying for a mortgage.
Find more tax planning tips for small business owners in this article.
Self-sufficiency isn’t always the best path
Business owners are accustomed to taking care of matters themselves, but securing a mortgage as a self-employed borrower isn’t always straightforward.
How to overcome the challenge: Working with a mortgage specialist can help you navigate the process and increase your chances of getting approved.
Overestimating what you can afford
It’s important to remember that you shouldn’t buy what you can’t truly afford. Just because your business income is $750,000, for example, doesn’t mean you should buy a $750,000 property.
How to overcome the challenge: Demonstrate caution. Pulling too much money out of your business one year may affect your ability to balance the profit and deficits in the years to come.
Frequently asked questions about securing a mortgage when you’re self-employed
- How many years of tax returns do I need?
Lenders require proof of income for the past two years. Those two years are the basis for the mortgage stress test.
- Do lenders look at gross or net income for self-employed borrowers?
Net income serves as the standard measure for assessing the financial viability of a self-employed borrower. It’s determined by taking an average of the previous two years of income.
- Can I use business income to qualify for a mortgage?
Business income can be used to qualify for a mortgage, but the onus on you to prove financial stability becomes greater.
- Is it harder to get a mortgage when self-employed?
Yes, it’s usually more difficult to get a mortgage when self-employed. Generally speaking, a lender will require higher credit scores and more documentation. Because self-employed income is often less predictable, a larger down payment may be required.
- What credit score should self-employed borrowers have?
If you want to secure competitive terms for your mortgage, a minimum credit score will fall within the 650–700 range. The higher the score, the better your chances of qualifying for lower interest rates or other advantageous terms.
Being self-employed shouldn’t prevent you from getting approved for a mortgage. Making sure you have a solid financial history, strong credit, and the proper documentation will ensure you’re putting your best financial foot forward. Book an appointment with an advisor today to discuss.
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