How Can I possibly get a mortgage when I am self-employed?
At the end of 2015 Statistics Canada said there were 2.76 million Canadians that were self-employed- more than 15% of the labour force.
More than half a billion Canadians position themselves as self-employed every year. So identifying can be challenging because of the definition of self-employed is vague. Self-employed individuals may be running their own business, such as commission base, run their own farms, freelance or professional careers. What we do know is according to Statistics Canada, this group is in a higher median income & net worth than regular salaried employees.
As these numbers continue to grow for self-employed individuals, lenders still are trying to figure out how to make it easier to obtain these clients a not only a great mortgage but a great rate. Now a days it has become more complex. In 2014 OSFI introduced the banking regulator guideline B-21, which requires all banks to look even closer to self-employed incomes before approving any application.
For self-employed borrowers, a federally regulated mortgage Insurer (FRMI) has outlined the steps that are valid for lenders to obtain income verification (e.g. NOA) or other relevant business documents to support the said income.
Income verification is now being completed by an independent source for the following reasons:
It’s difficult to falsify
Directly addresses the income amount declared; and
The income verification information and documents does not counteract other information that is giving by the borrower once it undergoes the underwriting process
Lenders want to be assured you are able to pay back the loan. So they will assess you based on 3 factors – Income, Network & Credit score.
Income stability is easy to prove if you are a full time employee. Any full time employee can provide T4 slips, a job letter signed by their boss, paystub or direct-deposit. Now what happens if you don’t have a boss? It makes it more difficult to provide when you are self-employed right?
When you are self-employed, to get an approval for your mortgage would be through stated income applications, which require signed income declaration and proof of self-employment. Stated income is how much claim you earn. To prove this, you will need to provide your lender the following documents:
Income Tax returns
Notice of Assessments (NOA’S) 2-3yrs worth
Notice of Assessments from Revenue Canada to ensure no taxes are owe
Proof that your HST/GST is paid in full
Copy of your business licence or articles of incorporation
Financial Statements of your business-be prepared to explain the nature of your business-your income & expenses
Proof that you are the principal owner of your business
Client contracts showing expected revenue for the upcoming years
Have a down payment of 15%
Once that is all in order, your lender will now look at your debt service ratio to qualify you. This will determine what you can afford monthly, next is your credit score. Make sure it’s acceptable and be sure to tell your lender what you have owing before they run a check. Lastly, ensure your credit cards are paid off. It’s important for a self-employed individual to have less debt than a full time salaried employee.
Certain lenders allow add backs for tax deductions to your income, such as car expenses, advertising, capital cost allowances and housing expenses. Other lenders may just simply only add a percentage to allow for business expenses.
Having a spouse or partner who is salaried helps, especially if they are co-signing. Remember that once they have signed they get title ownership. So be certain it’s an individual you can trust.
For the self-employed to own a home, it can most certainly be precarious, but with the proper preparation and with the help of one of many of our qualified Noble Mortgage Agents the path of owning your home can be feasible.