Qualifying For A British Columbia Mortgage As Self-Employed
What you should know before we get you approved for a self-employed mortgage
Not all mortgage lenders are going to favour each type of applicant. Some mortgage lenders consider self-employed people as a higher risk. Typically, there is more paperwork and a more thorough vetting process that needs to happen with a self-employed mortgage applicant.
You may end up paying more for the mortgage
Lenders may view you as a higher-risk borrower which means you pay a little extra to secure a mortgage.
Posted interested rates vary quite a bit between lenders, however, the interest rate you will qualify for may be a little higher. But, is it worth it? Absolutely! Here’s why… many of my self-employed clients show very little income on paper. This means we need to secure your loan utilizing certain mortgage products such as “stated income”. This means the interest rate is often slightly higher than if you declared more income, or had a T4 filed. However, when you calculate the extra interest cost of the higher mortgage rate, and compared to the alternative, it’s quite worth it! What is the alternative you ask? Simply declaring more income on your tax returns, and therefore paying more income tax!
The increased income tax you pay is much more than the small increase in interest rate with a “stated income” mortgage product. With that said, if you declare enough income, you can often secure the same great mortgage rates and terms that a client that files a T4 is able to qualify for.
The lender will require more documents
As counter intuitive as that might seem, the actual mortgage application process for self-employed and T4 employees is quite similar. You are going to get an interest rate quote, fill out a mortgage application, sign paperwork and provide supporting documentation.
The documentation requirements, however, is a different story. While employed applicants need to provide a few supporting documents (T4s and payment stubs) as proof of income, self-employed clients are required to show a bit more documentation. These include financial statements prepared by a certified accountant, CRA Notices of Assessment and T1 and/or T2 Generals to name a few. The documentation requirements will also change based on if you are a sole proprietorship or a corporation. I can help guide you in collecting and verifying all these documents.
Lending standards for self-employed are challenging, but I’m here to help
I always set reasonable expectations and am completely honest with clients. Most banks and lenders require a minimum two-year track record of earnings. As I mentioned above, these tax returns may not reflect your actual take-home income. There are lenders that I work with that will consider less than a two-year history of income, but once again, they may come with a higher mortgage rate and possibly restricted terms.
As a self-employed person, you should be writing off a number of expenses to lower your net income for tax purposes. For mortgage applications, however, this is not ideal. Lenders calculate your debt-to-income ratio – a measure of how much of your income is used to service your debts – using net income after expenses. Because you might be deducting a lot of expenses and showing a lower net income, your debt service ratios will not be as appealing to lenders. That’s where it becomes challenging because lenders prefer standard debt-to-income ratios of approximately 35 – 44 per cent.
How we can work together to get your self-employed mortgage application approved
It might seem overwhelming at first, but I’m here to help. In my network, I have lenders that specifically want to help the self-employed secure new mortgages.
Here are some tips to help you score a great mortgage as a self-employed person.
1. Planning ahead
Lets meet and discuss your situation well before you are ready to secure a mortgage. We can look at your debt, expenses and business growth. How much income do you plan to declare and what are some major write-offs? Some underwriters will allow you to put certain expenses back into your income. All of these factors will influence which mortgage product is best for you.
2. Keep a good credit score
It is very important to maintain a high credit score. There are many mortgage products that are only available to those with credit scores above a certain benchmark. Some websites give you free access to view your credit score so ensure to monitor yours at least twice a year. There may also be circumstances where your credit report has a small ding in it, something that has been corrected but lingers. Keep all the documentation and details of the event in your files.
3. Be organized
Keep your financial statements, tax returns, T1 Generals, CRA Notices of Assessment, etc, as organized and accessible as you can. Having your documents in order and available to the lender helps instill confidence, expedite the application and secures more favourable rates and terms.
Documents you will need as Self-Employed:
- Government issued Photo ID
- The last 2 years of Notice of Assessments
- The last 2 years Full T1 Generals
- If you are claiming the company as an asset then company financials might be required.
- Proof of other sources of income, if any
- All assets – Recent statements from bank accounts or investment accounts
- All liabilities – Recent statements for any credit cards, loans, etc.
- Down payment amount source
I’m always happy to schedule an in-person meeting or phone call if you have any questions or concerns regarding your Surrey mortgage.