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The challenges of getting a mortgage when you’re self-employed

The challenges of getting a mortgage when you’re self-employed

self employed business owner applying for a mortgage

Being self-employed makes a business owner feel truly independent. It’s a big responsibility finding your own customers or clients, doing the work, taking care of the paperwork, payments, and accounting. With all that on your to-do list, you’d like to think securing a mortgage wouldn’t be a trying task to take care of. However, what is typically a straight-forward and simple transaction as an employee with a pay stub, it’s quite the opposite for someone who is self-employed.

What’s different about applying for a mortgage being self-employed?

To start, you don’t have a pay stub proving that you make the money you say you do. It seems like such a little thing. You have good credit, you pay your bills, you file taxes. Why is that not enough? Well, to a mortgage lender, that seems a little risky. As an employee you have an employment contract that says you are guaranteed a job and for every hour you work, you get paid an hourly rate or perhaps an agreed annual salary. As a person who is self-employed, there is no guarantee that you will have work or make money.

It doesn’t mean you can’t get a mortgage though! 

It just means that you’re going to have to make a case to show evidence of consistent money coming in and that you’re actually profiting enough to cover the mortgage, regular bills and the taxes that come along with owning a home.

What does a self-employed person have to provide to the lender as proof of income?

Typically, you will be required to supply 2-3 years of income tax returns, your notices of assessment for each of those years, financial statements prepared by a certified accountant, Your T1s, and T2s and possibly a few other documents depending on whether you have a sole proprietorship, if you’ve incorporated, or you’re part of a partnership.

Lenders will also like to see that you’ve been working in the same business for all the years you’ve supplied documentation for. The reason being is that if you’ve spent a year as an electrician, a year as a freelance graphic designer and a year cutting grass for example, that will appear less consistent to the lender. Because of that, you could appear to have a less stable long-term outlook making you a higher risk for not being able to make repayment on the loan.

Is the process of applying for a mortgage as a contractor or freelance employee any different?

Not typically. If you’re working as a freelancer or a contract employee the lender will still want to see proof of income for the past few years. Even if you are considered a long-term freelance employee, it can be difficult to get a lender to understand the relationship between your employer and yourself. That’s why you’ll want to be prepared to answer a lot of questions and possibly even show proof of contracts and the worth of each contract too.

What else might be different for a self-employed individual when applying for a mortgage?

  • You might pay a higher interest rate because you’re considered to be a higher risk to the lender
  • You might need a co-signer if your debt to income ratio doesn’t add up to what they would like to see
  • You might get approved for a lower mortgage amount than you might have expected
  • You might need to wait a year or two before applying for a mortgage to be able to have income tax statements that prove a higher income by claiming less write-offs

Getting approved for the mortgage you need while being self-employed can be tricky but it is totally possible and worth the effort. Working with an experienced mortgage broker will help you not only simplify the process but, it will give you access to more lending options than you’ll find at the bank. Working with a mortgage broker who is also your financial partner with experience in life insurance, investing, and long-term planning works to your benefit even more. Why? Well, because your financial partner knows your business, your family, long terms goals, and can help you align your finances in advance of big purchases like buying a home to improve your likelihood of getting approved for the loan you need. If you’re looking for help securing your mortgage and the lowest rate possible before buying a home or once you’ve made an offer to purchase, give me, Darren Robinson a call at 705-315-0516. I’m here to help answer any questions you might have and to swiftly take care of the paperwork needed to get you into that dream home as soon as possible.

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