Mortgages for the Self-Employed

If you are an entrepreneur looking to lock down a home of your own, you may have come across certain roadblocks in the way of obtaining a reasonable mortgage. If you’ve been turned down or offered outrageous rates, you may be losing hope that you’ll ever be a homeowner. Fortunately, there are ways for self-employed Albertans to get a mortgage. You just have to know what your options are. 

Self-Employment

Before we discuss the process of applying for a mortgage if you are self-employed, let’s define who is considered under this term. Anyone who works for themselves and does not earn a fixed salary from an employer is defined as self-employed. Many positions can fall under this category, such as business owners, freelancers, and farmers. In cases of incorporation, an individual is only considered self-employed if they are employed by the corporation they own as well as earn a salary from it. 

Income Verification

In a traditional mortgage, the lender will use your net income as reported on your last tax return. The issue for self-employed individuals, though, is that tax deductions and claimed expenses can dramatically reduce that number. To a lender, this will appear as though you cannot afford as much home as your 9-5 neighbour down the street. To remedy this, you should make sure to apply for a self-employment mortgage and not a traditional one. The main difference is that the lender will assess your income through other means. There are three main types of income verification:

1. Traditional Income Confirmation. This is your net income as reported on your tax return. In most self-employment cases, this is not sufficient for a lender to consider your application. 
2. Non-Traditional Income Confirmation. For this option, the lender will utilize your business’s financial statements to help paint a clearer picture of your actual income. Keep in mind that you should have this information for at least two years. Businesses younger than two years often don’t have enough of a financial record to convince a bank to lend enough money for a mortgage.
3. Stated Income. B lenders and private lenders will sometimes offer “no income verification mortgages”. Instead of providing proof of income, you simply state the amount in the application. The caveat here is that rates tend to be higher and CMHC will not insure a stated income. If you are putting less than 20% down on the home you will have to go with a private insurer like Sagen. 

Main Takeaways

• Apply for a self-employment mortgage. If you’re not sure how to find out what lenders offer this product, work with a mortgage broker to help you narrow down your options and cut down your leg work significantly.
• Have at least 2 years of self-employment income. This is the very minimum that lenders will accept. If your company is younger than that, use the time to build up a greater down payment. 
• Prepare all your necessary documentation. You want to convince a lender that they should give you money. Assuage their concerns by providing your tax returns, financial statements, Notice of Assessment, bank statements, and any other information you think may be useful. Remember that you can always work with your broker to help you determine exactly what paperwork you need. 
• Don’t forget about the basics of home buying. At the end of the day, a great credit score and a sizable down payment will be key factors in your chances of getting approved for a mortgage.  

If you are self-employed, owning your own home is an achievable goal. A great mortgage broker, like the ones on our team at Source Mortgage, can help guide you through the process and answer any questions along the way. Get started by sending us a message today!