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Starting your own business is an exciting time in your life. You get to be your own boss and to directly benefit from your own hard work. However, one area where you might run into additional challenges is obtaining a mortgage. Roughly 15-20 percent of all Canadians are self-employed, but even making up such a significant portion of the population, they can still have to produce additional documentation when they’re getting a real estate loan.
Issues with proving income tend to be the biggest barriers – it can be difficult to verify how much a self-employed worker has actually made. That said, there are some easy tips that self-employed workers can keep in mind when starting to get into the loan application process.
Now before we dive into the process of applying for a mortgage while working independently or running your own business, click the link below to book a free strategy call with us so that we can show you exactly what you need for your specific financial position.
Problems with verifying self-employed income
The number one problem that self-employed Canadians run into when applying for a mortgage is that it can be difficult to verify their incomes. For starters, there are tax advantages that go along with keeping your income number low. Keeping your taxable income low is, of course, the easiest way to pay less in taxes. For that reason, most self-employed people are incentivized to heavily expense their business costs and thus minimize the amount of their income that’s actually taxable.
This is savvy management, but it can, unfortunately, come back to bite you. When it comes time to get a mortgage many lending officers will simply see a lower income number and wonder how you think you’d be able to keep up on payments with the property you’re looking at. If you make $80,000 a year but expense $30,000 of it, your loan officer will treat you as though you have an income of $50,000.
The other main downside to applying a self-employed worker is the down payment – the cash payment that you’re putting forward to secure the loan. If you’re in a more “traditional” employment situation then you might be able to put down only five percent as a minimum down payment. Self-employed people, who are seen as a larger risk due to a higher likelihood of erratic income, will have to come up with more like 10 percent, and sometimes as much as 20 percent.
Seeking private loans
Private lenders are becoming a more popular option for self-employed over the past several years. To just draw from one geographic example, private lenders have doubled their share of the Greater Toronto market from 2015, and they now originate roughly eight percent of all mortgages there. Private lenders can offer less advantageous rates than traditional government lenders, but the upside is that they’re usually more likely to approve loans from self-employed applicants than government sources are.
Government testing for mortgages has become even more stringent in recent years, with failing stress tests and low credit scores plaguing some applicants. Self-employed people have it even worse thanks to the challenge of offering concrete proof of their income. Private lenders do not typically have these stress tests, which means proving that you can afford payments at an even higher rate than the one you expect to qualify for.
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Prepare your documents
You can save yourself a lot of time and aggravation by having your documents ready to go when you apply for a loan. Right or wrong, loan officers will likely ask more questions of a self-employed lender. It’s best to have the paper trail ready to back up your assertions about your financial situation. For every lender, this stack of papers should include monthly bank statements, corporate tax returns, your business balance sheet, a profit-and-loss statement, business credit card records and preferably some credit references from financial institutions.
On top of those documents, self-employed borrowers will need to produce several more. A letter from their accountant, verification from their landlord that they pay rent on time and a personal balance sheet that demonstrates all of your financial assets, both personal and business, will help buttress your case.
When a lender is evaluating your application, they will likely average everything out over the last two years to get a more comprehensive picture of your income, etc. rather than just a snapshot from the most recent year. You will also need to provide proof that you’re truly self-employed – you’ll need to have been so for at least two years to qualify for a self-employed mortgage.
Mortgage mistakes to avoid
Getting a self-employed mortgage approved can get sidetracked by any number of factors, so it’s best to control what you can control and avoid common mistakes. Inflating your income is a common one – this number will be verified anyways, and you’ll easily be found out, so why bother?
You also should wait to apply until you have a sufficient down payment. This is a tricky one for self-employed borrowers, but if you can’t meet the minimum down payment required then you’re wasting your time by starting the process.
Mismanaging debt is a common mistake as well. First of all, not all debt is bad. Responsible management of a credit card is a great way to build a credit history that lenders can check into and rely upon. It can even take the place of cash – swipe your credit card and then make a payment for that exact amount through the app and you’ll never let your debt get out of control.
You also should never hide debts – it’s best to be upfront and honest with a loan officer. If they find that you’ve hidden any financial obligations, then you’re likely to have your application denied on those grounds alone.
Being self-employed comes with many challenges, and getting a mortgage approved is no different. Preparation is key here – you want to make sure that all of your financial ducks are in a row and that you’ve saved plenty of money to meet any down payment standards. Don’t be afraid to shop around and get the best deal that you can, and don’t forget that private lending options exist to help get you into the home of your dreams.
How To Get A Mortgage When You’re Self-Employed, With Scott Dillingham
You can apply directly from our team at LendCity. We offer mortgages for the self employed. To get started click the link above or call LendCity at 1-519-960-0370. Additionally to learn more check out this video and click the link below to book a free strategy call with us.