Can I Get A Mortgage When I’m Self-Employed?
For the self-employed, a mortgage might be a huge goal. For others, it may be something they’ve never considered because they work for themselves and business is unpredictable. If you’ve been in the latter camp, it doesn’t have to be that way.
In 2014, approximately 2,752,300 Canadians were self-employed, according to figures from Statistics Canada. For many Canadians, self-employment means freedom from someone looking over their shoulders and freedom to make their own choices about projects they take on.
Sometimes it means income isn’t as steady, but that isn’t always problematic. Individuals who are self-employed are often seen as credit risks, because these individuals can have wildly variable income levels from month to month and year to year.
At CVE Mortgage Group, Inc., we believe that being self-employed shouldn’t mean that an individual will have trouble getting a mortgage. We work with numerous lenders with self-employed specific programs that help self-employed individuals achieve their mortgage goals. There are lenders out there who offer mortgages for the self-employed, and we work with many of them.
The Canada Home and Mortgage Corporation (CHMC) offers mortgage loan insurance options for self-employed residents who are looking for a mortgage to purchase, refinance or make improvements to a home. There is a common misconception that CMHC does not provide mortgage loan insurance to self-employed individuals.
Types of Mortgages for Self-Employed Individuals
There are several different types of mortgages for individuals who are self-employed, including the following programs:
- Stated Income Mortgages: Lenders allow potential borrowers to state what their income is; this type of mortgage typically requires account statements that show deposits or a business license to show that the business is active. These typically require a down payment of up to 20 percent (20% equity for a refinance) and may also include a fee. Mortgage insurance would not be required.
- Business-for-Self: Lenders allow self-employed business owners who declare their income to provide 2 years of tax returns and take a 2 year average of that income to determine how much will be used towards the debt servicing of your mortgage which determines the mortgage amount a client would be approved for. These types of mortgages allow for a down payment of less than 20%
- Alt-A Mortgages: these mortgages require a 15-20% down payment for purchases and refinances alike, but many of these lenders take non-traditional proof of income documents. For example, as opposed to 2 years tax returns, a lender might take 3-6 months bank statements to prove cash-flow from a business or even use gross income as opposed to net income to calculate ability to service the mortgage loan.
Things to Know When Pursuing a Self-Employed Mortgage
In the past, a self- employed individual had an opportunity to get a stated-income loan, based on their credit score and a statement regarding their income. Those days are long gone, and now, bankers go through far more paperwork for a self-employed mortgage.
Lenders look at several figures to determine whether a person is a good candidate for a mortgage. They take an individual’s monthly income, average annual income and their debt-to-income ratio as part of their calculations. They derive the monthly income figure by adding together the adjusted gross income figure from two years worth of tax returns and then divide that figure by 24.
Essentially, most lenders will take that two year history and take the average income over those years. For example, if an individual earned $50,000 in 2013 and $60,000 in 2014, lenders would typically use $55,000 in income for calculating the affordability of a given mortgage for that client.
Lenders want to know that borrowers can afford their mortgage and their other financial responsibilities. They look at the debt-to-income ratio to determine how that plays out. Forbes magazine reports that lenders look for two numbers: the housing-related debt payments, or front-end payments and the recurring debt payments, or back-end payments. Housing-related payments shouldn’t be more than 39 percent of income (for excellent credit, score of 680 or higher for CMHC insured mortgages), while recurring debt payments shouldn’t be more than 44 percent for the same credit worthy client. These numbers drop to 35% and 42% respectively for clients with credit scores from 600 to 679. Below 600 credit scores are only approved for CMHC insured loans on an exception basis.
Alt-A mortgages are typically more lenient on these numbers, some even going as high as 60%/60% for the respective ratios.
Tips to Make Qualifying For a Mortgage Easier When You’re Self-Employed
There are several things you can do to make qualifying easier if you are a self-employed individual and you’re seeking a mortgage to purchase a home.
- Take fewer write offs at tax time. This will increase the amount of your taxable income, but in this situation, having a higher taxable income show up on your tax returns is a good thing. If you start planning early, take fewer write offs for the two years preceding your application for a mortgage.
- For a high ratio purchase you’ll need a consistent history. You’ll want to show gains or financial stability for two consecutive years.
- Make sure you have good credit. A high credit score is very important when it comes to a self-employed mortgage, because this is a strong indicator of how an individual handles their money – both everyday expenses and big purchases. If you are lacking in this department, a significant down payment might be necessary
- Get pre-qualified. The pre-qualification process helps you to understand how much you can afford and can help you to avoid surprises when you sit down with a lender to discuss your ability to qualify for a mortgage.
- Be prepared to provide a large down payment for purchases. If you don’t have excellent credit and provable income over a 2 year period, a 15-20% downpayment might be necessary
- Be ready to explain your business. At some point, you’ll likely have to explain your business, from what you do and who your customers are. Lenders like to have quite a bit of information to find the right mortgage option for clients.
Refinancing for Self-Employed Individuals
A mortgage refinance for a self- employed individual shares many of the characteristics of that of a self-employed purchase.
- Like any refinance, you will need at least 20% equity in your home
- To qualify for the best rates on the market, you will need at least a credit score of 600 or higher, with evidence that you have met your credit obligations on a continuous basis for a long period of time
- A 2 year history of income will also be necessary to qualify with the top tier lenders offering the most competitive rates
- If your credit or income falls outside of the prior parameters, a sub-prime or private mortgage refinance might be required
- Keep in mind what you may be able to qualify for. Lenders will consider what the payments would be on the new mortgage as well as your current debt obligations such as credit cards, lines of credits, car loans, and even business related debts that you have personally guaranteed.
- These items will all dictate your rate, term, and which lender you end up with.