Anyone who is self employed knows that it’s sometimes more difficult, than those employed, to obtain loans or other forms of credit. Obtaining a self employed mortgage approval can often be a challenge due to a variety of factors which include:
inconsistency of income deposits
Self employed individuals don’t have a set amount that they receive for their work. Depending on services rendered or goods sold, the amount of their income can fluctuate. Other factors contribute to this fluctuation, but these are just to name a few.
Infrequent pay schedule
For similar reasons that cause the “inconsistency of income deposits”, those very reasons can contribute to the frequency of the payment schedule. A self employed individual may pay themselves one month and not the other, or one week and not again until a few weeks later…
Lack of arm’s length relationship between employer and employee
Since a self employed individual is considered to be their own boss, there isn’t the typical separation of boss and employee that you would find in an employment relationship. For this reason, it wouldn’t be valuable for a potential mortgage lender to confirm your income with the typical job letter and pay stubs. I’m sure you can see the obvious conflict of interest.
Leveraged Tax benefits often lower income and in turn, lower tax obligations
One of the greatest benefits of being self employed is to leverage all the potential tax benefits to reduce your tax liability. However, this is a double edge sword because it benefits in one instance (lower taxes) but handcuffs you in another (seeking credit).
So what are my options?
Fortunately, there is hope, although many of the typical banks favor employed borrowers, there are alternative lenders who take a common sense approach to lending to self employed borrowers. Unlike Banks, these lenders understand that self employed mortgages require a more accommodating income approach when underwriting a mortgage application. For example, If they know that self employed individuals have the challenges noted above, they simply solve those challenges by requesting the following documents:
- 2 years Notice of assessments – to average income + gross it up 15-25% (reasonably)
- 6-12 months business bank statements – to use gross business income minus “reasonable expenses”
- Articles of Incorporation/ Business License/ HST Number – to establish sufficient business tenure (typically 2 years minimum)
- A few Invoices – to match up against income deposits in the business bank statements
- Self-Declared letter – a signed declaration that the income you are claiming to make is accurate and makes sense when compared to all other documents provided.
As you can see these alternative methods to determine qualifying income can favor borrowers seeking a self employed mortgage because it’s a more common sense approach to establishing what income they can use. Having said that, not all mortgage lenders offer mortgages with this approach in mind.
Fortunately, we have established the right lending partnerships to serve the needs of our self employed homeowners. So if you are looking to purchase or refinance your home and you happen to be self employed, the best thing to do is give us a call. We will happily work with you to go over everything and offer you the right guidance toward successfully getting approved – (905) 455-5005