You’re self-employed and need a mortgage

It’s becoming more challenging for self-employed workers or those who earn commission to get a mortgage to purchase a home. Nearly 20 per cent of all income earners in Canada are self-employed; and the category is growing.  They are individuals operating their own businesses and those who work on 100% commission such as Realtors, insurance brokers, and even mortgage brokers. This group has the most difficulty getting a mortgage because a good tax accountant will identify write-offs to reduce income to pay the least amount of tax, which may not reflect traditional earnings.

Mathieu McCaie, a mortgage agent with TMG The Mortgage Group in Moncton New Brunswick who works with self-employed clients doesn’t necessarily see you as ‘higher risk’ due to the source of your income. “I understand the value of self-employed clients and what they’re trying to accomplish and can provide lending solutions to help them with their personal home as well as investment properties,” he said. “However, there are guidelines that may seem more stringent then for self-employed borrowers.”

By offering expert advice, agents like McCaie can alleviate the time and frustration that most self-employed individuals experience when looking for a mortgage. Even with an excellent credit score, most lenders will ask for financials and personal tax assessments for up to three years. Those documents may not be available, depending on your situation. For example, if you are new in business, you may have only one year of tax returns.

Recently,  lending criteria for self-employed individuals has changed making it even more challenging to get a mortgage loan. However, some lenders are now offering the Stated Income program for clients who don’t have a lot of documentation. “A few months ago, this program seemed to be on hold but is now gaining some ground again as some insurers have opened it up again,” McCaie said.

Financing your home

There are a number of ways to finance a home when you are self-employed. You can opt for a conventional mortgage if you have a down payment of at least 20% of the appraised value of the property. Since you are making a larger down payment and have equity in the property,  it mitigates the risk the risk to the lender. In addition, conventional mortgages often do not require mortgage insurance.

Also, the self-employed come under stricter scrutiny to get approved for either a conventional or a high ratio mortgage and an approval will depend on a number of factors. If you have provable income, there is much more available to you. Provable income requires you produce, but is not limited to, the following:

1.  Tax returns showing income
2.  Recent Notice of Assessment showing no tax arrears
3.  Documentation showing self-employment for two years
4. No delinquencies in the past 12 months
5. No previous bankruptcy or out of bankruptcy for at least a year with reestablished credit

Self-employed borrowers who are unable to provide traditional income verification but have a proven two-year history of managing their credit and finances responsibly may be able to qualify under the Stated Income program. Here are the guidelines:

1. The income reported by the borrower must be reasonable based on the industry, length of operation and type of business
2. Strong credit profile with a minimum of  two trade lines with at least two (2) years history 
3. Minimum 5% down payment from the borrowers own savings. The remainder may be gifted from an immediate family member. Borrowed down payments are not allowed from m,nay lenders 
4. No tax arrears
5. Property must be owner-occupied

Scenario 1

Perhaps you are a 40-something carpenter who has been operating your own business for just two years. You have one year of tax returns. You have worked in the industry for 10 plus years. Your credit score is high, -- 700 plus –and have at least two trade lines that show a history of good credit management.  You have a business license, a website and have saved 10% for the down payment.  To complicate matters, the house you’re buying is a private sale.

Working with a mortgage broker, you may be able to access the Stated Income program – an ideal product for those with low documentation –and get low rates. 

Scenario 2

You’re a 20-something entrepreneur operating a painting company for one year.  You’re looking for a fixer-upper in a good neighbourhood. However, you’ve had some credit issues and your score is in the low-600s. You don’t qualify for “A” lending with best rates but you may be able to qualify through an alternative lender. If you have your NOA, a business license, a website, bank statements for the six months showing an income stream and 10% as a down payment, which can be gifted, a mortgage broker can help.

The mortgage interest rate will likely start at 4.5% and go up from there and there is usually a lender fee; and there might be a broker fee as well. However, the fees are not necessarily high – it depends on the situation.

While being self-employed does not mean you won’t qualify for a mortgage – it means there are different rules and different products available to you – a mortgage broker can help you navigate the landscape with you.