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Self Employed Mortgages
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With 15% of Canadians being self-employed, obtaining a mortgage can be difficult for a variety of reasons. The income of self-employed Canadians is often less predictable than those with steady employers. In addition, banks don’t always recognize that those who are self-employed or own their own business often expense as much as possible to save on taxes. With the above challenges, it can be hard for a self-employed individual to secure a mortgage; however, it’s not impossible. Let’s take a look at the options available to a self-employed individual looking to apply for a mortgage.
What Documents Do Self Employed Individuals Need To Get a Mortgage?
It is important for self-employed individuals to compile all the necessary documents in order to strengthen their application for a mortgage. Oftentimes, if a self-employed individual can provide evidence of income, they can be eligible for regular remortgage rates and products. Individuals who cannot prove income may need to prove a strong credit history as well as a minimum down payment of 10% (the typically minimum down payment in Canada is 5%). Here are some other documents necessary for a self-employed individual to obtain a mortgage:
- Evidence that your HST and/or GST is paid in full
- Notices of Assessment
- Contracts showing expected revenue and past revenue for the last few years
- Personal and business credit scores
- Proof of principal ownership in the business
- Business license
- Proof that your down payment has not been gifted
Self Employed Mortgage Default Insurance Premiums
Mortgage Default Insurance (CMHC insurance) works the same for self-employed individuals as it does for everyone else, provided that you can prove income through tax Notice of Assessments. If you are only putting down between 5% and 19.99%, you must pay a premium; however, you don’t have to pay a premium if you put down 20% or more. Mortgage premiums are added to mortgage payments and paid off during the amortization period, or the lifespan of the loan.
Factors To Increase Your Chances of Approval
There are some steps you can take to make yourself more attractive to a mortgage lender, including having a high credit score, offering a larger down payment, having lots of capital or cash reserves, paying off your debt, and ensuring your records are accurate and up-to-date. Let’s take a look at some of these factors in more detail.
Your Credit Score
When it comes to applying for a mortgage, whether you’re self-employed or not, your credit score plays an important role in your approval. Paying off your credit card debt, accepting credit increases and not surpassing them, ensuring debts never go to collections, and paying off bills like rent, phone plans, cable, etc. on time are all great ways to increase your credit score. If your credit score is high, you will be more attractive to a lender and might even qualify for lower interest rates.
The Down Payment
The more equity you have in your home, the less likely you are to abandon it in times of financial hardship. If you put a bigger down payment on your home, the bank will likely see you as less risky, since you put down a lot of money from the beginning. Moreover, with a bigger down payment, the amount of money that the lender gives you is smaller, resulting in more affordable monthly payments.
The less debt you have, the easier it will be to make your mortgage payments. It’s a good idea to settle as much debt as you can to free up your money to pay your mortgage.
Keeping accurate records of your self-employment will establish a strong track record. Banks are more likely to lend to you if you can prove that you have been successful in your self-employment. If possible, try to have at least two years of self-employment history under your belt before applying for a mortgage. However, be sure to keep an eye out on interest rates. If the rates are low, it might be worth applying for a mortgage even if you don’t have all of your history documented.
Make sure to keep your tax and business records accurate and up-to-date. Disorganized records might make a lender less likely to trust your ability to carry a mortgage. To encourage more trust from a lender, ensure your records are in order before applying for a mortgage.
Self Employed Mortgage Alternatives
If you are self-employed and still cannot access a mortgage from a bank, there are other options. More and more self-employed individuals are seeking funds from alternative private lenders.
Since many self-employed individuals deduct a lot of their expenses from their income for tax purposes, their incomes will appear low to a bank. Even with a good credit score and savings, banks will be wary about lending money to someone who they feel has a low income.
Private lenders are concerned with debt-to-income calculations, which means adding back deducted expenses to net income to make it higher. In exchange for a higher interest rate and other fees, private lenders are more likely to lend to a self-employed individual even if their income and credit score aren’t high. The trick is to ensure your tax and business records are up-to-date and accurate and to speak with a mortgage broker before applying for a mortgage.
Should You Get a Mortgage as a Self Employed Individual
If you’re still on the fence about applying for a mortgage as a self-employed individual, let’s take a look at some of the pros and cons.
Availability: More than ever, there are many available lenders willing to offer you a mortgage if you have the right documentation
Higher fees and interest rates: Lenders, especially private lenders, are almost always likely to have higher fees and interest rates on mortgages for self-employed individuals.
Good Investment: Paying off a mortgage isn’t easy, but the value of a house as an investment is sure to appreciate over time.
Might need to hire an accountant: Self-employed individuals need a lot of documentation for income and taxes that can be complicated to compile. You might want to consider hiring an accountant to ensure your documentation is ready for a mortgage application.
Damaged credit: If you are rejected for many mortgages, your credit score will be negatively affected by the multiple credit inquiries.
Defaulting if your income is unstable: Self-employed individuals sometimes have unpredictable income. If business is good for a year and then takes a dive the next year, a self-employed individual might be forced to default on their mortgage.
The bottom line is that applying for a mortgage as a self-employed individual poses more challenges than someone who has a stable salary as an employee. However, with all of the options available to you as a self-employed individual for mortgages, it’s worth considering making it work, as the rewards may outweigh the risks.
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