Mortgage approvals for those with stable employment have always been straight forward. These applicants for the most part, provide job letters and paystubs to confirm their income. As long as the information checks out through verbal verification methods, their income is considered to be satisfied.
Those that are self employed often perceive their road to a mortgage approval as an uphill battle and much more difficult. Although it is true, that self-employed applicants have a greater burden to proof to establish their income qualification, the difficulty may not as bad as one might think.
Since self-employed individuals may not be able to provide an arms-length job letter and paystub, they can however provide alternative forms of documentation that can support their earnings. These include the following:
- Recent 2 years Notice of assessments and T1 Generals– these documents are used to establish the average of the most recent 2 years gross income, based on what was declared to the Canada Revenue Agency.
- Master business license, Articles of incorporation or HST/GST registration – these documents are used to confirm that the business is established and operating legally (with sufficient tenure)
- Self- Declared Letter – A signed letter of self declaration of income that the applicant is stating they earn (including typical business expenses).
Now it’s important to note that there are several tax advantages that self-employed individuals receive, which often lowers their overall declared income to the CRA via tax write-offs and other benefits. This is why most mortgage lenders use the “Self-Declared Letter” in conjunction with the tax (CRA) documents, in order to determine the reasonability of income. Simply put, they understand that the tax documents would likely show less income than what is truly earned by the applicant. An example of this is as follows:
If an applicant who is a painter has recent taxes that show an average gross income of $40,000 per year and declared that he/she is earning $80,000 per year, this may be a “reasonable” statement of earnings and the income will likely be supported by the lender. However, if the same applicant were to declare that he/she is earning $150,000 per year with the same tax documents, the lenders would likely not be able to support the earnings for various reasons (both internally within that specific bank and externally with parties such as default insurers, etc.).
There is also an abundance of lenders that use alternative forms of documentation, such as Business/personal bank statements + invoices to support the declared income. These lenders usually require at least a 20% down payment, but often can help home buyers with their purchase in ways that a traditional lender may not (not to mention, these lenders also allow higher debt servicing ratios!).
If you are a self employed and would like to discuss your personal circumstances in greater detail, please feel free to reach out to us today! – 905.455.5005.