Individuals who work for themselves and are not employed (by an arm’s-length employment contract) with an organization are said to be self-employed. Self-employment has grown in popularity over the past few years as more people look for professional flexibility and independence. However, being self-employed can pose unique challenges when trying to get a mortgage.
To successfully navigate the application process, it’s crucial to understand the specific requirements for a mortgage. Unlike traditional employees who can rely on regular pay stubs and T4s, self-employed borrowers need to provide alternative documentation to prove their income and financial stability.
Eligibility Criteria for a Self-Employed Mortgage
To be eligible for a Self-Employed Mortgage in Canada, individuals must meet specific criteria:
- Proof of Income
First and foremost, proof of income is crucial. Self-employed borrowers need to demonstrate a stable and consistent income stream to assure lenders of their ability to make mortgage payments. This typically involves giving proof such as the last two years of corporate and personal tax returns, along with a Notice of Assessments.
To evaluate the borrower’s financial stability and creditworthiness, lenders may also demand financial statements including profit and loss accounts and balance sheets.
In addition to income, creditworthiness is an important factor in determining eligibility. Lenders review the borrower’s credit score, credit history, and debt-to-income ratio to assess their ability to manage debt responsibly.
By maintaining a good credit score, paying bills on time, and keeping outstanding debts low, borrowers can demonstrate responsible financial management and increase their chances of mortgage approval.
- Minimum Downpayment
Another criterion is the down payment. Self-employed borrowers are typically required to make a minimum down payment of 10% of the purchase price. Having a larger down payment can provide additional flexibility and improve the borrower’s chances of mortgage approval.
- Length of Employment
Lenders also consider the length of self-employment. Most lenders favour self-employed people who have been in business for at least two years. This track record helps establish stability and reliability in generating income.
Specific Documentation Requirements for Self-Employed Mortgages
To apply for a Self-Employed Mortgage in Canada, there are specific documentation requirements that borrowers need to fulfill. These requirements include:
- Tax Returns and Financial Statements
Self-employed individuals are typically required to provide personal and business tax returns for the past two years. These tax returns serve as a primary source of income verification and provide insight into the financial stability of the business. Business Financial statements such as profit and loss statements and balance sheets may also be necessary to further assess the borrower’s income stability and overall financial position.
- Bank Statements
Lenders often request bank statements for the past twelve months. These statements help demonstrate the borrower’s cash flow, regular income deposits, and financial stability. Recent transaction history can also provide additional information about the borrower’s financial management practices.
- Business Licenses and Registrations
Proof of business registration, licenses, permits, or certifications may be required to verify the legitimacy and operational status of the self-employed business. These documents confirm that the business is compliant with relevant regulations and contributes to the borrower’s credibility.
Tips for Improving Your Mortgage Approval Chances
As a self-employed borrower, you can improve your mortgage approval chances by focusing on several key tips.
- Maintain strong credit health: Pay bills on time, reduce outstanding debts, and review credit reports regularly.
- Save for a larger down payment: This demonstrates financial stability and commitment to the mortgage and reduces the loan-to-value ratio.
- Keep thorough financial records: Maintain accurate records of income, expenses, bank statements, and tax returns.
- Minimize changes to income and employment: Avoid significant changes before applying for a mortgage to show income stability.
- Seek professional advice: Consult with mortgage brokers or loan officers specializing in Self-Employed Mortgages for guidance and assistance in the application process.
To secure a Self-Employed Mortgage in Canada, borrowers must carefully understand the requirements and prepare the necessary documentation. This preparation increases their chances of obtaining mortgage approval and ensures a quicker application procedure.
As mortgage brokers in Ontario, Canada, we understand the unique challenges faced by self-employed individuals. That’s why we encourage self-employed borrowers to explore mortgage options tailored to their needs.
In search of personalized assistance and guidance? Contact our team at Orion Financial to consult with professionals and learn about your Self-Employed Mortgage options.