You’ve worked hard to establish your own business. Why should that work against you when getting a mortgage? The truth is, it shouldn’t. The reality is, it doesn’t have to.
Working with a skilled mortgage broker will help you navigate the process and requirements of acquiring a mortgage when you’re self-employed.
Before agreeing to finance your loan, a lender wants assurance that you will be able to make dependable payments and hold up your end of the agreement. For this reason, it can be more difficult for self-employed people to secure a mortgage.
From the lender’s perspective, they want to see a consistent and reliable income. That typically means they will get their payments on schedule. For someone working for a large company, it is easy to look at a T4 slip and determine they will have the funds needed for repayment. It may be a bit more difficult when dealing with a business owner whose cash flow varies from week to week.
In addition to variable income, businesses often lower their tax burden through tax deductions. This can really help with cash flow but it also lowers your income (on paper).
Despite these challenges, there is hope. There are ways to improve your chances of getting a mortgage when you’re self-employed. With two to three years of stable financial information from your company, you should be able to access the same mortgage products, rates and payment amounts as everyone else.
If your business is fairly new and still getting established, it is not impossible to be approved for a mortgage. With a great credit rating and a decent down payment you will be in a good position.
If you are self-employed and looking to buy a home there are a few things you can do to put yourself in a favourable situation before applying for a mortgage.
A great credit score will only improve your situation, regardless if you are self-employed or work for a company. While it is possible to get a mortgage with a less-than-ideal credit score, a better score will get you better rates.
Business owners tend to take on personal debt to get their business up and running. This is very common but it’s important to remember to make your payments on time. If you can show a good credit history to your lender, they will appreciate that you’re responsible for repaying what you owe. This could be a car loan, credit card or line of credit. Ideally you will have several years of consistent payments to show when applying for a self-employed mortgage.
Some mortgages only require a 5% down payment. For business owners relying on their notice of assessment, likely 10% would be needed. And if you need to prove your financial viability through bank statements, you’ll probably need to save 20% for your down payment.
If you can save above and beyond the minimum, your mortgage will be viewed as less risky. The lender will appreciate that you’re invested in your home and have more equity. This means you’re less likely to walk away if you find yourself in a challenging financial situation.
In addition, a higher down payment works in your favour as your mortgage payments will be lower and you’ll pay off your mortgage quicker.
Having a credit history is one thing but you’ll want to ensure your debt to income ratio is not too high. Lenders want to know you’re not maxed out and you will be able to handle the mortgage payments in addition to any other debt you have.
As with all financial loans, bad credit doesn’t rule you out. But, good credit does improve your situation. If you’re dealing with a less than ideal credit score, you can increase your chances for approval with a larger down payment. The bigger the down payment, the better – for you and your lender.
You can also improve your debt to income ratio. If you currently have a lot of other debt, consider paying it off before applying for a mortgage. If that is not possible, speak to your broker about alternative and private lenders.
If you own other property or assets and your debt to income ratio is manageable the lender may overlook your credit score. There are a lot of factors at play so it’s best to discuss your unique situation with your mortgage broker.
There are a number of reasons why working with a broker makes sense, particularly when seeking a self-employed mortgage.