Are you a self-employed Canadian hoping to get a mortgage in the near future? If so, understanding what’s required and how these mortgages work could help you improve your chances of getting an approval.
Here are five things to know about getting a mortgage if you’re self-employed.
1. Yes, self-employed Members can qualify for a mortgage
Some people think if you own your own business, you won’t get a mortgage unless you pay a high interest rate to a private lender. Yet many financial institutions, including credit unions like Meridian, offer mortgages to self-employed Members.
If you have an established business with at least two years of acceptable financial statements, the income you earn from that business could help you qualify. Self-employed applicants own full or part-time businesses, including sole proprietorships, incorporations, and partnerships.
2. Be sure to have your personal and business details ready
Mortgage lenders have basic requirements for all applicants. This includes
- Credit history and score
- A confirmation of funds for the down payment and closing costs with three months of bank/investment statements to confirm the source and history of the funds
- Verification of investment and savings assets including bank accounts, RRSPs, and TFSAs
- Details on outstanding debts like mortgages, credit cards, credit line, and loans
- Rental property income and mortgage details if applicable
- The purchase agreement with MLS listing and lawyer contact information
- Your Social Insurance Number (SIN)
- For a refinance, confirmation that property taxes are up-to-date
- A void cheque if mortgage payments will come from a different financial institution
In addition, self-employed applicants must also provide
- For incorporated businesses - two years of financial statements (Income Statement and Balance Sheet)
- Documentation for other income sources
- Two most recent years of Personal NOAs (Notice of Assessments) and tax returns
- 3 months of business bank statements
- Confirmation that HST/Source Deductions are current
Lenders review tax paperwork to confirm there are no tax arrears to the Canada Revenue Agency.
3. Self-employed income is calculated through a slightly different method
When you work for someone else and get a regular paycheque, lenders often require a letter of employment and your most recent paystubs to confirm and calculate annual income.
However, figuring out a self-employed applicant’s income is more complicated. That’s because unlike an employee who gets paid a regular, consistent hourly rate or an annual salary, the income of self-employed mortgage applicants can fluctuate.
Lenders will either take an average of two years’ income or your most recent annual income if it’s lower.
4. A good credit score could be your key to getting a mortgage approval
As a self-employed borrower, your credit score could help smooth the way to getting a self-employed mortgage.
Lenders consider credit scores when they’re assessing the risk of lending money. Since self-employed income will be less stable than traditional employment income, a good credit score can only help your application. Check your credit score for free once a year through Canada’s Credit bureaus, Transunion and Equifax.
5. A pre-approval is a good first step to getting a self-employed mortgage
If you’re curious about qualifying for a mortgage when you’re self-employed, you can learn more by contacting us.
A pre-approval will help you understand how much you qualify for. It will also include a list of the required documentation you’ll need for your own self-employed mortgage.
With a good credit score, two or more years of verifiable income, a satisfactory down payment, an acceptable level of debt payments and the cashflow required, you could soon be on your way to buying that home you want.