Self Employed? We have you Covered.
If you are a self-employed person in Ontario, this article is for you. Are you looking to get a mortgage to purchase a home or to refinance your current home but don’t know where to start?
Let us help you.
“What is a self-employed mortgage?”, you might ask. Self-employed mortgages are a type of mortgage that is available to an individual who owns their own business (a sole proprietor or partnership or incorporated) and has difficulty providing proof of income, such as a pay stub or tax documents.
Self-employed mortgages are typically more difficult to obtain than traditional mortgages because some mortgage brokers don’t have the experience and lenders have a harder time verifying the borrower’s income. It is not uncommon for self-employed borrowers to pay higher interest rates due to this risk. However, it is still possible to obtain a self-employed mortgage in Ontario at a reasonable rate. Some Steps you can take right now that will make the process of securing a mortgage much easier. Here are a few tips to follow that could help you to obtain a better mortgage rate and allow you to purchase the home of your dreams:
1. Document your income.
It might be straightforward, but having your paperwork in order will make getting that approval go much more smoothly. As a self-employed individual, you are likely already used to filing income tax returns on an annual basis. Under the self-employed mortgage process, Ontario lenders will still require documentation in the form of qualifying income. This includes proof that you have earned an income that is sufficient to cover both the mortgage you are seeking and any other personal expenses you have while also allowing for enough financial flexibility to cover unexpected expenses. This could include bank statements, HST returns and T4 slips from previous years. Your Mortgage Broker and lender will review these documents to assess your ability to repay the mortgage.
Don’t stress if your NOAs (Notice of Assessment documents) are less than impressive. We have many lenders beyond the top five banks, such as specialized lenders and credit unions that are more interested in your bank statements when calculating how much income you actually bring in.
2. Plan long-term.
Though a self-employed mortgage may not require the same documents as a traditional mortgage, lenders will still expect that you plan to continue in your self-employment for an extended period of time. In accordance with this, you may need to provide a realistic and comprehensive plan for your business and the overall sustainability of your income.
Often, lenders will look at how many years you’ve been in business and how much you’ve brought in over at least the three previous years to determine how stable your income will be in the future.
3. Consider alternative sources of income.
During the application process, you may be asked to present sources of income outside of your primary business. Depending on your situation these income sources could range from rental income to other non-traditional forms of revenue. Some institutions may even include monthly benefits like the Child Tax Credit when calculating your debt ratio.
4. Save money for a larger down payment.
While it is not always required for a self-employed mortgage borrower to provide a very large down payment, it may be beneficial to have one. Setting aside funds for the future is always a good idea and depending on the size of the down payment, you may be able to lower the size of your monthly payments or even qualify for a better interest rate.
In addition, some lenders limit the percentage of a home’s value that a self-employed borrower may apply for. If you’re making a purchase, this means you’ll need to cover the difference from your savings.
5. Pay attention to your credit score.
Make sure your credit score is in good standing. Your credit score plays an important role in the mortgage application process and will determine the interest rate that you are offered.
In literal terms, this means having a credit score of at least 680 or higher. Having a good credit score is always beneficial when it comes to applying for a mortgage – regardless of whether you are self-employed or not. Depending on the history of your credit and your ability to prove sufficient income, a healthy score is typically necessary to obtain a favourable rate on a self-employed mortgage.
Self-Employed Mortgages – Your Next Step
As with any major decision, it is always important to do your research and speak with a qualified mortgage expert to make sure you are fully informed on all your potential options. Obtaining a mortgage as a self-employed individual in Ontario is definitely possible with the right preparation and the right plan for the future.
The idea of owning your own home in 2023 can be daunting for anyone – but it can feel especially difficult for those who are self-employed.
The good news is that working with an experienced mortgage broker, Gerard Buckley (with over 40 years of financing experience and a self-employed person himself of 15+ years), can get you the solution you’re looking for. He has advised many growth companies and he will give you more ways to get home financing approved. Reach out to Gerard today to learn what mortgage solutions are available for your unique situation.
