It’s that time of year for a self-employed business owner to sit down and file your company’s year-end. But are you planning on buying a house in the near future? Or is your mortgage up for renewal soon? These are important questions to think about if you are a freelancer or entrepreneur. When it comes to getting pre-approved for a mortgage as a self-employed individual the process is a little bit different. There are a few extra steps that you must take as a self-employed person to get the best mortgage rate possible and to get approved for the mortgage you want to secure your dream home. People who run their own businesses are considered potential risks for mortgage lenders due to unsteady income. There is no guarantee that you will have work or make money as they see it. As an employee, you have an employment contract that says you have a guaranteed job and that outlines every hour you worked. To get the best mortgage rate out there, you have to prove to your lenders that you are capable of paying your bills and will be able to make your payments on time and in full without issue. A trusted mortgage broker like myself, Darren Robinson, can help you get all your documents in line so you can get pre-approved for a mortgage. And, if when it comes down to it, your mortgage application isn’t as strong as it needs to be, I can help you strategize to give you the best chance possible of getting approved for the mortgage you want.
How is getting pre-approved for a mortgage different when you’re self-employed?
Everyone who is filling out a mortgage application goes through the same basic steps. However, if you’re self-employed, you will have to put more time and effort into your application to show your lenders that you are the ideal candidate to get approved for a mortgage. Your income is evaluated after all your business expenses have been calculated and the part your lender is going to look at is your profits. So if you write off many expenses for your business, then that amount gets taken off your yearly income. It’s a basic equation of money in minus money out. Although you may be making a lot of money overall if it doesn’t look that way on paper, your lender is likely to be wary of that. Your lender will also want you to show more background information than they would ask of someone that is employed with a T4. This is why working with an experienced mortgage broker is important. Your mortgage broker will know exactly what you will need to prepare in advance of your application. You’ll need likely 2 years of your income tax returns, your notice of assessment for each showing nothing is outstanding in payment. Your bank statements for the last year, and your balance sheet or profit and loss statements too. You should also be prepared for them to look into your loan both personally and business-oriented because those too will play into your debt-to-income ratio.
Preparing an outlined portfolio with extra documentation in advance will prove to your lender that you are not a risky investment.
Your goal should be to prove to your lender that you aren’t a risky investment. You need to show that you have a stable income and that your business will continue to see solid financial success in the future. So, what should you include in this portfolio?
- 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
- possibly a few other documents depending on whether you have a sole proprietorship, are incorporated, or if you’re part of a partnership.
They may also ask for older documents to show your financial patterns from year-to-year. The reason being is to make sure you didn’t have any money issues in the past and that you’re consistent with the amount of business you see on a regular basis. It’s also common for the lenders to request a list of assets, and any additional sources of income such as investment properties or investment account like RRSPs, TFSAs, etc. The more documentation you provide, the better your chances are of getting pre-approved. And, having these put together in advance of meeting with your mortgage broker will ensure your mortgage application process is submitted swiftly.
How can you improve your chances of getting pre-approved as a self-employed person:
Put down a larger downpayment
If you pay more money upfront, they will view you as less of a risk. Putting money aside as an emergency fund is also a great idea in case your business has a rough financial month. This shows that you will have extra cash for incidentals and to pay your monthly mortgage bills if needed in slower months.
In business, everyone tries to minimize the income tax they pay at the end of the year. However, when you expense just about everything you can, often doing so means that your income tax return might not showcase the true profit of your business. That profit is crucial to show in order to get approved for a mortgage especially if that mortgage you’re applying for isn’t a small one. Although you may be paying more taxes during the time before buying a new home, it will be worth it in the long run. Making sure you have two years of strong profit on paper in advance of applying for a mortgage will increase your chances of getting approved for the mortgage you need.
Improve your credit score
This one is pretty straightforward but, sometimes overlooked. Review your finances, pay off any debts possible, and don’t take out any new loans while you are applying for a mortgage. Having a good credit score will help you qualify for lower interest rates and lower interest rates mean saving money long term.
Get a co-signer
If your debt-to-income ratio doesn’t add up to a number that will impress your potential lender, it may be a good option to get a co-signer who has a steady and consistent income to help strengthen your application. Having a co-signer will show your lender that they don’t have to worry as much about whether or not you will make your payments on time as your co-signer will be responsible for making your payments for you should you default. It’s important to note that asking someone to co-sign a mortgage for you isn’t a small ask. Make sure it’s someone you trust without question because if the payments don’t get made on time then both of you will suffer financially.
Lastly, work with an experienced mortgage broker for the best chance at getting approved for the mortgage you need with the best possible rate.
Even if you have all your paperwork lined up, a lender may still consider you as high risk and give you a higher interest rate. By working with a trusted mortgage broker like myself, Darren Robinson, I can help you get pre-approved for the best mortgage rate possible. Entrepreneurial business owners deserve the same financial prosperity as everyone else and you have more mortgage options than you may think plus, working with a mortgage broker can help you save time, money and reduce added stress. If you’re ready to take the plunge into becoming a first-time homebuyer or you’re ready to refinance your current mortgage to take advantage of a lower interest rate, give me a call at (705) 315-0516 or click here to book a free consultation online now.