Getting a Mortgage When Self Employed

Can a self-employed person get a mortgage? While getting a mortgage can be intimidating for any applicant, it can be particularly challenging for self-employed individuals. Unlike traditionally employed applicants who can present stable income records through pay stubs and employer verification, self-employed individuals must navigate a different terrain, often facing more stringent scrutiny and complex criteria. However, with the right documentation and strategic planning, these hurdles can be overcome. Let’s learn more about how to get a mortgage when you are self employed.

What is a Self Employed Mortgage?

Self employed mortgages in Canada cater to the unique financial situations of individuals who generate income through their business activities, such as freelancing, owning a small business, or contractual work. To be eligible for a mortgage with self employment, individuals must present the following:

• Proof of Income – Traditional mortgage applicants typically provide pay stubs and employment verification letters. Self-employed individuals must present alternative forms of income verification, such as Notices of Assessment (NOAs) from the Canada Revenue Agency for the past 2-3 years, profit and loss statements, bank statements, and tax returns.
• Business Documentation – This includes business registration documentation, articles of incorporation (if applicable), and the most recent business licenses.
• Financial Stability – Lenders will scrutinize your business and personal financial stability. A strong credit score is essential, as it signifies financial reliability. Having a savings cushion or emergency fund is also advantageous, as it indicates financial preparedness for potential income fluctuations.

How Many Years of Self Employment to Buy a House?

Most lenders require at least two years of self-employment history to qualify for a mortgage. This period provides a track record demonstrating your business’s stability and ability to generate consistent income.

Types of Loans for Self Employed Individuals

The way to secure a mortgage as a self-employed individual will depend on your financial situation. There are types of mortgages for the self employed:

Conventional Mortgages – Conventional mortgages are the typical route for most borrowers, including those who are self-employed. These loans are not insured or guaranteed by the government and, therefore, require stringent income verification and often higher credit scores. While obtaining a conventional mortgage can be challenging due to the need for extensive proof of stable income, it often offers lower interest rates than other loan types.

Stated Income Mortgages – A stated income mortgage can be a viable option for self-employed individuals whose income may not be easily validated through traditional documentation. With a stated income mortgage, borrowers declare their income based on what they believe they can afford rather than what can be documented through standard means. Typically, lenders will require a larger down payment to offset the increased risk associated with not verifying income through traditional methods. Expect to put down at least 20-35%.

Private Mortgages – Private mortgages are loans provided by private lenders or mortgage investment corporations rather than traditional banks. These lenders often have more flexible criteria but have higher interest rates and fees. Self-employed individuals with lower credit scores or less traditional income verification might find private mortgages an accessible option.

Mortgage from Credit Unions and Smaller Financial Institutions – Credit unions and smaller financial institutions tend to be more flexible with their lending requirements and are often more accommodating to self-employed borrowers. They may offer terms and conditions tailored to meet the needs of those with non-traditional income sources.

Broker-Assisted Mortgages – Mortgage brokers have access to a wide range of lenders and can find mortgage options that might not be readily apparent to the average borrower. They also have expertise in preparing applications to meet the specific requirements of different lenders.

Improving Your Chances of Approval

Securing a mortgage as a self-employed individual can be challenging, but there are several strategic steps you can take to improve your chances of approval:

• Check your credit report frequently to ensure there are no errors or issues that could negatively impact your score.
• Pay all bills on time and keep your credit card balances low relative to your credit limits.
• Build a cash reserve that can cover several months of business expenses and mortgage payments.
• Pay down existing debts to improve your debt-to-income ratio.
• Increase your down payment. Saving at least 20-35% of the home’s purchase price can significantly improve your approval odds.
• Provide a detailed and organized portfolio of your income sources. This should include tax returns, Notices of Assessment (NOAs), financial statements, and bank statements showing consistent income. If you have additional income sources, such as rental property earnings or investments, document these thoroughly.
• Keep all your business documents current, including tax filings, business licenses, and registration documents. Consider hiring an accountant to prepare your financial statements and tax returns.

Navigating the mortgage landscape as a self-employed individual in Canada can be challenging. Still, with the proper preparation, documentation, and understanding of the available loan options, it is certainly achievable. Contact RE/MAX today to find an agent to guide you through the home-buying process.