Interested in learning about what private mortgage lenders offer for the self-employed? This article will answer popular questions around self-employment financing and teach you how to get the loan you’re after.
When talking to BFS — business-for-self — individuals, most of them are unhappy with the many write-offs they receive, which, in turn, lowers their income.
The discussion often drifts into comparing the taxation rate with the bank’s mortgage rate, but here is the trick; when looking at the whole picture with the goal of saving money, the tax rate should be compared with the interest rate. This is what makes alternative mortgages substantially cheaper.
Taxation is one thing. Interest is another.
Here are a few tips to help you find a mortgage lender, traditional or private while maintaining your status as self-employed.
Difficulties Self-Employed Borrowers Encounter
Before looking at what private mortgage lenders can do for the self-employed, let’s first see what difficulties self-employed borrowers encounter when looking to access traditional financing.
While enjoying the freedom of being their own boss, the over 2.9 million self-employed Canadians may still find themselves restricted by most mortgage lenders when applying for a loan. And this is because self-employed business owners are still considered risky borrowers due to the instability of their income flow.
A fixed income is considered more stable than its varying counterpart which depends on sales, contracts, and other business costs. The risk, of course, is the borrower not being able to make their monthly payment and falling behind on their mortgage.
That said, more and more lenders are warming up to independent contractors, especially since most business owners tend to direct their business expenses towards reducing their taxable income.
How To Get Your Self-Employed Mortgage
Self-employed workers usually fail to qualify for a standard mortgage loan because of their varying supply of income. However, a special type of mortgage has been developed, tailored to business owners’ needs.
Cue the self employed-mortgage! This non-traditional mortgage is only open to borrowers owning full-time or part-time businesses. Sole proprietors, incorporations and partnerships qualify as long as they’ve owned their businesses for at least two years.
Just like other home loans, self-employed mortgages come in fixed and variable mortgage rates and can be arranged for different term periods. The borrower can either place a higher down payment of 20%+ or pay a premium. Keep in mind, premiums tend to go higher for independent contractors than for someone applying for a standard mortgage. This premium goes on top of the mortgage and will be paid off along with the mortgage payments.
When applying for a self-employed mortgage, one may seek the help and experience of a mortgage broker. These professionals have special access to trustworthy private mortgage lenders outside the big bank circuit and can help you locate one specialized in self-employed home loans.
How To Apply For a Self-Employed Mortgage
A traditional mortgage application is a relatively quick and easy process. Applicants need to provide proof of employment income, bank statements, and credit score to receive approval. For self-employed workers in Canada, the process is a little more complicated — you’ll likely need to arm yourself with quite a bit of patience, or go shopping for a private lender.
Since self-employment home loans are considered high-risk, more documentation is required from the applicant to prove their ability to meet their payments. Most traditional lenders might request the following documents:
– Financial statements related to your business income.
– A Notice of Assessment (NOA) from the past two or three years.
– Personal credit score and history.
– Proof that your personal tax returns have been paid.
– Proof that you are the principal owner of your business.
– Some lenders might also require contracts proving expected revenue.
– GST license or Article of Incorporation for your business in Canada.
– Optional, some stricter lenders might request proof that your down payment was income-based and not a gift.
By providing a Notice of Assessment, you will have a higher chance of receiving the same mortgage rate pack as a traditional borrower.
Tips For Self-Employed Borrowers
Inarguably, freelance mortgages are one of the toughest types of mortgages to qualify for. You need to own your business for two years before applying, and even then, approval is not guaranteed. But there are ways to improve your chances.
The first thing you need to do is create a robust documenting system for your income and contract history. Many business owners choose to cover their business expenses out of their income, thus reducing tax returns. The advantage is that it allows more money to flow back into your business.
However, a lender might see it as inability to make your mortgage payment. To counter this, you can document your income through a paper trail, providing proof that you have sufficient funds for a mortgage deal.
The CMHC (Canada Mortgage and Housing Corporation) now allows a wide range of documents to be used to prove your net income and employment to your lender. Including:
- T-4 slips
- Pay stubs
- A copy of your federal tax return
- Proof of income statement from the Canada Revenue Agency
- A T2125 — a statement of business or professional activities — form.
Mortgage brokers recommend filing these documents every year. This will be beneficial for your tax returns as well as a possible home loan application in the future.
A good credit score can save you from a lot of headaches.
A score between 690 and 900 is considered trustworthy by lenders, and proves your capacity to pay off loans. The best way to improve your score is by taking out conventional loans. Think about taking a car loan and paying it off or simply using your credit card. Every on-time payment will count towards your credit history and improve your score.
Consider a larger down payment. Of course, this means you will need to save more money, but it will reduce the return risk in your lender’s eyes. Turning in a 20% down payment will paint you as a financially responsible individual and will help you avoid paying for mortgage loan insurance. Default insurance premiums can add between 2.8% and 4.0% of the purchase value to your mortgage.
If you are not time-pressured, it’s recommended to save more and avoid the premium for the home loan.
What Private Mortgage Lenders Can Do For Self Employed Individuals
If you’ve been turned down by traditional lenders because of your self-employment, contact a private mortgage lender for help. While most lenders are usually more comfortable lending to those with a regular source of income, a private mortgage lender may be more willing to work with a self-employed borrower. They understand that self-employed borrowers often make more money than full-time employees and are willing to work with you on your loan terms.
And unlike traditional lenders who need to see that you have good credit, a private lender doesn’t care. As long as you have enough money for the down payment and closing costs, you’ll be able to qualify for a mortgage. This gives self-employed borrowers a chance to get financing, even if they have bad credit.
If you want to discuss what private mortgage lenders can do for self-employed borrowers, get in touch with us. We work with both private and traditional lenders and have enough mortgage products to suit all your loan needs, from home equity loans to non-resident mortgages and no income mortgages, we’ve got you covered.
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