Taking Out a Mortgage When You're Self-Employed

Are you someone who’s self-employed and you’d like to take out a mortgage? There’s a misconception out there that just because you’re self-employed, it’s a lot more challenging to qualify for a mortgage. That simply isn’t true. There may be more steps involved, but having the right information organized can help you apply for a mortgage if you’re self-employed.

Although you’ll need good credit for a mortgage regardless of your employment status, there are differences in how you should approach getting a mortgage when you’re self-employed versus an employee for a company. In this article, we’ll look at qualifying and applying for a mortgage when you’re self-employed.

Qualifying for a Mortgage When You’re Self-Employed

Qualifying for a mortgage when you’re self-employed is different than when you’re an employee of a company.

When you’re a permanent salaried employee, mortgage lenders will look at your base salary rate to determine the mortgage loan amount you can qualify for. It’s a pretty simple and straightforward process. Even if you’ve only just started a new job, as long as you’re off probation, there should be no issue with using your current salary.

When you run your own business, lenders see it as riskier than if you worked for a company. It may take some time for you to generate a steady amount of income from your own business. As such, mortgage lenders are usually looking for at least two or three years of business income. This proves that your business is here to stay and has a history of generating steady income.

Applying for a Mortgage When You’re Self-Employed

The application process is different for someone who’s self-employed versus when you’re an employee.

While it would be nice if lenders would simply take your word for how much you make, lenders will want to see proof of your earnings in writing.

When you’re an employee of a company, most mortgage lenders just ask for a recent letter of employment and pay slip, usually within 30 days. It’s usually a very easy process. You can request a letter of employment from the human resources department at your workplace. That might take a couple business days to receive. You should already have your most recent pay slip in hand.

When you’re self-employed, even if you pay yourself a salary from your company, the mortgage lender will want more documentation from you to better understand your business. Here are some of the documents you should have ready to share with mortgage lenders if you are self-employed:

• Tax returns from the past two years

• Notices of assessment from the Canada Revenue Agency (CRA)

• Corporate financial statements from the past two years (if your business is a corporation)

• Bank statements

• Invoices

• Contracts

• HST/GST returns

• Business license

 In lieu of a letter of employment and recent pay slip, the lender will want to see your tax returns for the last two years, along with the corresponding notices of assessment. If the notices of assessment indicate that you owe income tax, the lender will want to see a copy of your statement of account from the CRA to show that the balances owing have been paid in full.

If your business is set up as a sole proprietorship, that should suffice. However, if it’s set up as a corporation, that’s when you’ll be required to provide further documentation.

For corporations, the lender will want to see your corporate financial statements for the last two years. Your corporate financial statements include a list of assets and liabilities for your business, along with your business’ income statement. Your corporate financial statements let the mortgage lender make a true assessment about the health of your business.

This is only the bare minimum in terms of documents. The lender may ask for further documents, including bank statements, invoices, contracts, HST/GST returns, business license and articles of incorporation.

Can I Still Get a Mortgage if I don’t have Two Years of Tax Returns?

Similar to any non-guaranteed income (non-guaranteed hours, bonus, overtime, etc.), mortgage lenders will want to see two years of your tax returns, of which an average is taken of your business income to determine how much income you can use for mortgage qualification purposes.

The good news is, yes, you may still be able to get a mortgage if your business is newer and you don’t have two years of tax returns. It all depends on the circumstances.

For example, if you were the employee of a company and you decided to go off on your own and start your own consulting company doing the same thing, many lenders are okay with just one year of tax returns. The lender mainly wants to see that you’re working in the same industry, doing something similar.

There are also alternative lenders that offer stated income programs. With these programs, you may be able to qualify for a higher mortgage loan amount than you would with a prime lender. That’s because these lenders let you project your business income into the future based on bank statements and other methods.

You don’t need to have two years of tax returns to use this projected income. But that comes at a cost. In exchange for this flexibility, you’ll usually pay higher mortgage rates and perhaps a lender fee. But if it gets the job done, then it may be worth it.

Paying Yourself Too Little

Another issue self-employed individuals run into is not claiming enough income on their tax returns to qualify for a mortgage. Your business may be super successful. Your business may earn over $1 million a year in sale revenue, but if you go with a traditional lender, that won’t matter. All the traditional lender will care about is how much income you claim on your personal tax return.

If you only pay yourself a small salary, this will cause issues for you qualifying for a mortgage later on. If you’re planning to apply for a mortgage, you have to pick your poison.

Do you want to continue to pay the bare minimum in taxes and therefore have to go with an alternative lender and pay a higher mortgage rate and possibly fees, or would you prefer to claim more income and pay more tax, while getting a better mortgage rate?

This is something your accountant and mortgage professional can help you decide (although there are some mortgage lenders that offer extended debt ratios for business owners, making it easier to qualify for competitive mortgage rates).

Something to be aware of when you’re a sole proprietorship is that it’s your net business/professional income that lenders use. That’s your business income after expenses. Not your gross (before expenses) income.

However, to recognize all the expenses business owners can write off, most mortgage lenders let you increase your net business/professional income by 15 percent.

Final Thoughts

These are some of the things to know when taking out a mortgage when you’re self-employed. By working with a trained mortgage professional, they can help package everything for you to ensure everything goes smoothly.