There are many advantages to being self-employed. In fact, there is a growing number of people in Canada who are leaving their 9 to 5 corporate jobs, to begin a business of their own. Not everything can be easy though, and it can be a bit harder to qualify for a mortgage when you are an entrepreneur.
There are specific requirements that each mortgagee(s) must meet. Being self-employed reduces your income on paper; write-off and tax reductions such as meals, rental space, credit card interest etc. As a result, recent years of tax returns don’t accurately reflect the true take home income of self-employed individuals. So, how does one show enough income in order to qualify for a mortgage when they are self-employed? The following points are suggestions and strategies for how to plan ahead and be prepared when you are ready to apply for a mortgage.
- Practice writing-off less. The easiest way to prepare for a mortgage is to write off fewer expenses in the two years leading to your mortgage application. Yes, that means you will pay more personal taxes, but your income will be higher and you will qualify for a higher mortgage amount.
- Use a certified accountant to handle your finances. Many lenders want to see a professional accountant submitting your taxes. The benefit is that a certified accountant has more experience understanding tax implications, and can set up your taxes appropriately to help you achieve the goals you are looking for.
- Timing. Plan your timeline with income in mind. If you are leaving on an extended holiday or sabbatical within the two years previous to purchasing a home, your two year average income will be lower. Plan to take your time off after the purchase of your new home.
- Stated Income. Ask AC Lending about stated income. Some lenders will allow you to state your income. Often, this depends on you being in the same profession for two years at least. Lenders will look at the industry and research the mean income of someone comparable with a reasonable amount of time. AC Lending can offer experienced advice about how to negotiate this kind of proof of income.
- Bankruptcy. Lenders generally do not like bankruptcy. Although, some lenders will overlook this if there has been consistent and excellent credit since the time of bankruptcy and you have been fully discharged from the bankruptcy for a certain period of time. Make sure you keep all Bankruptcy and discharge papers on file.
- Higher interest rates. Be prepared for higher interest rates. Most lenders will charge self-employed individuals a higher interest rate because their income does not show in a conventional manner. Also, there could be lender fees attached to the mortgage.
- Larger down payment. It can be beneficial for self-employed individuals to offer a larger down payment. Lenders’ hands are often tied to the insurer when there is less than 20% of a down payment on a property purchase. However, if you can offer more than 20% down there is a chance the lender can be more flexible and accommodate your wishes.
- Private financing. As a last resort, private financing is also available for self-employed persons looking for a mortgage. Even though it is an expensive option, you are more likely to be approved for the amount you want. Rates will be higher and there will be lender/brokerage fees. However, you could be in a private mortgage for 12 months or even less and have an advantage to show a stated income and increase your credit. The purpose of private financing is to be used as a short term solutions.
There are many factors involved in showing income when you are self-employed. Every lender has different guidelines, but it helps to plan ahead and be prepared. AC Lending is available to answer any questions and assist you in getting the mortgage you want while being self-employed.
Based on “How to Get a Mortgage While Being Self Employed In Canada By Geoff Lee