You’re thinking about buying a house, that’s great! Buying your first home is an exciting financial venture to take on. One of the first steps you will take on that journey is finding out how much of a mortgage you can get approved for. But, as someone self-employed, there are a few extra steps you may need to take. People who run their own business or are self-employed, are viewed by mortgage lenders differently than those with a pay cheque. You may make enough to afford a mortgage, but lenders will consider self-employed people as potential risks due to unsteady income. However, getting approved for a mortgage isn’t impossible. All you’ll need to do is put a little bit more time and effort into your portfolio to make yourself the ideal candidate to get approved for a mortgage. For the best outcome possible, work with an experienced mortgage broker like myself to get the job done.
How is getting approved for a mortgage different for self-employed people?
At a glance, getting approved for a mortgage as a self-employed person in comparison to a salaried person the process is mostly the same. Whether you are self-employed or not, everyone fills out the same mortgage application. Lenders will look at the size of a down payment, and a few other factors that will confirm if a borrower is financially able to afford a mortgage. However, the big difference comes down to income. When a lender is reviewing a salaried person, their income is evaluated through steady pay cheques or a note from their employer. Whereas self-employed people are evaluated by their net income after business expenses have been paid. This is where things get tricky.
Let’s say for example you are a self-employed person making $100,000 a year and you write off $20,000 worth of business expenses annually. You’re then going to be viewed the same as a salaried person who makes $80,000 a year (unless you can otherwise prove you have another stream of income). The more you expense for business reasons, the more is taken off your net income which validates the amount a lender will give you for your mortgage.
Self-employed people rarely have a steady income. Some months might be quite profitable while others aren’t depending on the ebs and flow of seasonal trends in your industry. This is why it makes it harder to get approved for a mortgage because lenders see this as a potential risk. But all hope is not lost. There are still things you can do to get approved for a mortgage.
How to get approved for a mortgage as a self-employed person.
If you want to get approved for a mortgage, you’ll need to find ways to show a lender that you have little to no risk when it comes to affording a mortgage. If you can’t prove this through your income alone, you’ll need to improve other areas of your portfolio. You have to show in detail that you can make the payments needed without being in financial distress.
A few of the things you can do to help improve your portfolio specifically are:
1. Have a decent-sized down payment.
This is important for anyone looking to buy a house. But, for a self-employed person looking to get approved for a mortgage, a down payment plays an important role. The bigger the down payment you can afford, the better. A lender will consider you less of a risk if you can pay more money upfront.
Along with have a sizable down payment, it’s also a good idea to show any cash reserves you may have such as an emergency fund. In case your business takes a bit of a dip, this shows that you still have extra cash put aside for mortgage payments and incidentals if necessary.
2. Have extra documents related to your income.
If what your income looks like on paper is what’s standing in the way of you getting approved for a mortgage, you may just need more proof to help your case. If for example, you have been self-employed for over 2 years, this may show lenders that your income is steady enough to make mortgage payments. You may just need to show older documents to demonstrate the patterns of your income year-to-year.
The more information you can provide your lender with, the better. This may include monthly statements and debt payments you are currently on the hook for. They might request a list of assets, additional sources of income such as investment properties, and so on. The more documentation you can include in your mortgage application, the more you’ll improve your chances of getting approved for a mortgage.
3. Have a great credit score.
Not just a good credit score, a GREAT credit score. This will not only help increase your chances of getting approved but will also help you qualify for lower interest rates. As this is again, important for anyone looking to buy a house, it is especially important for a self-employed person looking to get approved. The higher a risk you appear to be to a lender, the higher the interest rate they apply.
4. Pay down/off debts and loans.
If you can pay down any outstanding debt or high-interest loans you may have, this will also improve your chances of getting approved for a mortgage. This will show lenders that you have more cash flow to pay towards your mortgage, and less going towards other bills. You may even qualify for a higher mortgage loan by paying down your debts.
5. Have a co-signer.
If it’s necessary, you may need a co-signer to help verify that you will be able to afford a mortgage. Be wary of using a co-signer though. You need to be sure this is someone you trust. Also keep in mind that when using a co-signer, you are also putting them at financial risk if you are unable to make your mortgage payments on time. This is why before you ask someone to be your co-signer you think long and hard about how much of a mortgage you can realistically afford.
6. Work with an experienced mortgage broker!
When it comes to getting approved for a mortgage as a self-employed person, it seems as though mortgage policies are making it more difficult. With my years of experience as a professional mortgage broker, I know what it takes to get you approved for a mortgage – even if you are self-employed. If you want to get approved (or want to learn what you need to do to get approved) for a mortgage, I can help. Give me a call today at (705) 315-0516 and let’s schedule a virtual meeting to talk about your situation specifically. Getting approved for a mortgage shouldn’t be impossible – let’s make it happen!