Self-employed individuals often encounter a distinct set of hurdles when looking to secure a mortgage, making the process more complex and demanding when compared to those with traditional employment. But that is where we come in! With our extensive experience working with all types of self-employed scenarios, we understand the complexities and are here to guide you through the process.
When securing a mortgage as a self-employed borrower, the primary challenge lies in proving income. Lenders typically prioritize stable and consistent income, which can be challenging for self-employed individuals whose income fluctuates and is often kept low for tax purposes. Additionally, money retained within the business is not considered personal income, further complicating the task of providing the necessary income proof that lenders require.
Self-employed borrowers must also provide additional documentation to verify their income. Furthermore, some lenders prefer borrowers who have been self-employed for at least two years, making it more challenging for recently self-employed people.
To apply for a mortgage as a self-employed borrower, you will need to collect various documents, including
- Articles of incorporation or a master business license (if not incorporated)
- Business Number or GST/HST account number
- Notice of assessment and T1 generals for the previous two years
- Financial statements and corporation income tax return
- Up to 12 months of bank statements, possibly with some corresponding invoices
- Signed contracts may be helpful
Lenders will also require assurance that you have paid all the necessary taxes to the Canada Revenue Agency (CRA).
Traditional Qualifying Requirements
Qualifying through traditional avenues such as banks, credit unions, and national lenders is possible if you can prove your income through your notice of assessments (NOAs). Lenders will consider a two-year average of your income and may gross it up by 15% to account for deductions. Mortgage default insurers are also available for down payments of less than 20% and homes priced under $1 million, in which case lenders may consider less than two years of self-employment, and you can qualify for the lowest rates and downpayment.
Stated-income mortgages are available for individuals with challenging income verification. Here, you state your income, and your lender will confirm it through your bank statements, considering its relevance to your industry, occupation, and experience. These mortgages can be insured or uninsured.
Insured stated-income mortgages, insured by Sagen or Canada Guaranty, allow for A rates but have higher mortgage insurance premiums. However, there are some downsides, such as property value and loan amount restrictions, a minimum requirement of two years of self-employment, and specific credit and occupancy criteria. The minimum downpayment requirement is 10%, with 5% coming from your own sources.
Uninsured stated-income mortgages are possible through traditional lenders, but your NOA and gross-up amount must not deviate significantly from your stated income amount. Your lender will also verify your income through financial and bank statements.
The most common choice for self-employed borrowers is stated-income mortgages through B lenders, including well-known lenders like Home Trust and Equitable Bank. Clients appreciate these options because the reported income on their NOA is typically much lower than their stated income due to tax planning strategies. This option is particularly suitable for those who want to avoid maximum loan amount restrictions, have poor credit, or prefer the property not to be owner-occupied. These mortgages require higher down payments (20-35%) and come with higher rates and lender fees. However, they do offer the potential for 30-to-35-year amortizations. Typically, 12 months of bank statements are required for verification.
Private lenders serve as an alternative option when traditional and B lenders are unavailable, although they come with higher rates and fees. Working with an experienced mortgage broker is vital for self-employed individuals to navigate the mortgage process with private lenders.
Joe Purewal can help!
While obtaining a mortgage as a self-employed borrower can be challenging, it is possible with the right preparation and expert guidance from trusted Mississauga Mortgage Broker, Joe Purewal. Joe and his team specialize in working with self-employed borrowers and have strong relationships with lenders in this field. They will assist you in collecting the necessary documents, help with improving your credit, if necessary, secure the best lender for your situation, and handle your mortgage financing details, allowing you to focus on your business. Let’s simplify the process together. Contact Joe Purewal today!