Are you self-employed in BC, Canada and ready to apply for a home loan but don’t know how to prove your income? Keep reading to learn what your lender will need from you.
Does being self-employed make it harder to get a mortgage? Yes, and No. It used to be that the only way to prove your income was through tax returns, but there are now other documents a self-employed person could use as proof of income.
If you are self-employed and are wondering how to prove income, here is a list of tips we have compiled over the years that should help you understand what is proof of income for self-employed people and how to get ready for your mortgage application.
If you have any questions on how to prove income as self employed or need further assistance, feel free to reach out to us. We are here to help you through the process and ensure you get the best possible mortgage solution for your needs. CALL OR TEXT 778-839-3963 for a free consultation.
Keep All Of Your Records Organized And Up To Date
Whenever one of our clients asks us how to prove income as self-employed, we tell them to start by keeping all of their records organized and up to date so that when they do apply for financing, everything is ready for review. Do not wait until the last minute! The more organized you are now, the less stressful it will be to start your application process.
For Proof Of Income Include All Sources Of Income
When looking for how to prove income as self-employed, you must include all income sources. This entails all contract work, side gigs or even just cash flow from your business that is not reported on tax returns. If you are unsure how much money is coming in, ask your accountant or a financial planner.
Document Your Income With Letters From Clients/Customers
If possible, ask your clients/customers to write letters confirming the work they’ve done with you in the past year.
This should be done before applying for financing so that they can include any additional details about their work relationship with you — i.e., how long you’ve been doing business together. These letters can also help us verify how much money was earned during those periods when there were no tax returns filed — i.e. because business was done under the table.
Have Your Business Accounts Audited By a Chartered Accountant
This is the most important tip we can give to any person interested in how to prove income as self-employed. Have your business accounts audited by a chartered accountant, preferably one specialized in small businesses and self-employed individuals. The audit will ensure that your books are up-to-date and accurate. It will also help determine what type of financial statements you’ll need to provide during the mortgage application process.
When preparing the proof of income, you should also have your personal accounts audited by the same professional who did your business audit. This is another step to take before applying for a mortgage because it will ensure there are no discrepancies between the two sets of books.
Show The Lender a Copy Of Your Most Recent Tax Return Showing All Income And Expenses
If you are a sole proprietor, the lender will need to see your business income tax return. If you have more than one business or are self-employed, provide the lender copies of additional tax returns showing all income and expenses.
Check that your bank statements show a consistent pattern of credit card payments on time and in full each month.
If you have a large balance on your credit cards, or if there is any indication that you do not pay them off in full each month, the lender may require that you get rid of this debt before they will approve your mortgage application.
Need help with preparing the documents? We can help! Contact us today for expert guidance on preparing your papers and ensuring a smooth mortgage application process. CALL OR TEXT 778-839-3963.
Create a Business Plan
If you have been self-employed for less than two years, the lender may require additional documentation such as a business plan showing how much income you expect over the next few years. This is unless they can verify this from other sources.
If there is anything unusual about your application — i.e., you have a large income — the lender may require additional documentation to prove the legitimacy of the income, and ensure it’s not from illegal activity.
Book an Appointment With Your Mortgage Broker
It is important to note that some banks may charge higher interest rates to self-employed borrowers than they do to employees who are getting a mortgage through their employer’s benefits package. Private lenders, on the other hand, can be more flexible when approving a loan for self-employed individuals.
If you are tormented about how to prove income as self-employed and have a mortgage broker, book an appointment with them ASAP.
They will assist you in preparing the paperwork required for your mortgage application and can help negotiate your interest rate. They also have close connections with both traditional and private lenders and can help you find the one that suits you best.
A mortgage broker works for you, not the bank or other financial institution. They are independent agents who work with multiple lenders to find the best deal for your situation.
If you’re self-employed, they will help you determine how much income is needed to qualify for a conventional loan and what documentation your lender requires.
A good mortgage broker will also be able to find lenders that offer better terms for self-employed borrowers. They have access to a network of lenders who specialize in financing for the self-employed, don’t require as much income documentation as traditional banks do and don’t ask for proof of income.
Final Thoughts
Flexibility and a riskier lending process are exactly what you need to get approved for that specialized, self-employed mortgage in Vancouver. Our experienced lenders have successfully processed hundreds of applications for self-employed borrowers.
So if you are in need of advice on how to prepare proof of income for self employed and are ready to apply for a mortgage in Vancouver, BC, get in touch with us online or by calling 778-839-3963.
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FAQs
How does the Canada Revenue Agency (CRA) impact the process of proving income as a self-employed individual?
If you’re looking into how to prove income as self-employed, you should know that the CRA plays a crucial role in verifying your income through your tax returns and Notice of Assessment. Ensuring your tax filings are accurate and up-to-date is essential for providing proof of income.
What is the importance of separate bank accounts for business and personal finances?
Having separate bank accounts helps in maintaining clear and organized financial records, making it easier to distinguish between business and personal transactions. This separation can simplify the audit process and improve the accuracy of your financial statements.
How do deductions affect my net income as a self-employed individual?
Deductions can significantly impact your net income. Ensure you are claiming all eligible business expenses to reduce your taxable income. Consult with a chartered accountant to ensure you are taking advantage of all available deductions.
Can rental properties be included in my proof of income?
Yes, income from rental properties can be included in your proof of income. You will need to provide statements showing the rental income and any associated expenses to accurately reflect this income in your financial records.
How does child support affect my proof of income?
Child support payments can be included as part of your total income. However, it is important to document these payments accurately and ensure they are reflected in your financial statements.
What if I have a large balance on my credit cards? How will this affect my mortgage application?
A large balance on your credit cards can negatively impact your mortgage application with banks and credit unions but not with private lenders. Traditional lenders may require you to pay off or reduce this debt before approving your mortgage to ensure you have a stable financial situation.
How often should I review and update my financial records?
It is advisable to regularly review and update your financial records to ensure accuracy and completeness. This can be done quarterly or at the end of each fiscal year to keep your records current.
Can I use an offer letter or contract as proof of income if I have a new job or business?
Yes, an offer letter or contract can serve as additional documentation to support your proof of income, especially if you are newly self-employed. These documents can help lenders understand your expected income and financial stability.
How do loss statements or periods of low income impact my proof of income?
Loss statements or periods of low income should be included in your financial records. You may need to provide explanations for these periods to demonstrate your overall financial stability and ability to generate consistent income over time. Again, when it comes to how to prove income as self-employed, these statements won’t matter much if you are working with private lenders. These are mostly interested in the equity in your home.
Can accounting software help with record keeping and proving income?
Yes, using accounting software can significantly aid in keeping your records organized and accurate. These tools can help track income, expenses, and other financial transactions, making it easier to prepare your tax returns and provide proof of income when needed.
What role does a business plan play when looking at how to prove income as newly self-employed individuals?
A business plan is crucial for newly self-employed individuals as it outlines projected income and expenses over the next few years. This document helps lenders assess your financial stability and potential for generating consistent income.
How can a mortgage broker assist in navigating the proof of income process for self-employed individuals?
A mortgage broker can help by guiding you through the necessary documentation, negotiating with lenders, and finding lenders that are more flexible with self-employed borrowers. They have connections with various lenders and can help you find the best deal for your financial situation.
What if my income varies significantly from one year to another? How do I prove my income in such cases?
If your income varies significantly, you may need to provide additional documentation such as letters from clients, audited financial statements, or a detailed business plan to explain the fluctuations and demonstrate your overall financial stability.
