There’s a common misconception that it’s very difficult to get a mortgage if you are self-employed. This stems from the false perception that as someone who is self-employed you don’t have a steady income. Of course, this is not true. You can be self-employed and still ensure that you receive a set amount of income every year. What’s important isn’t so much your employment status; it’s being able to prove that you are financially stable and can make your mortgage payments. So, if you are wondering how to get a mortgage when you are self-employed, know that you only need to show you are a trustworthy borrower.
To help you do just that, we’ve put together a few tips to help you to apply for a mortgage when you are self-employed:
Learn what lenders need to know about you
As mentioned above, lenders are generally looking to see if you can be trusted to make your mortgage payments. Any lending institution assumes some risk when they give out a loan or mortgage. There is always a chance they will not be able to recover that loan or mortgage. To reduce their risk as much as possible, they carry out many checks to ensure the borrower will be able to pay them back. If there is any uncertainty about whether the mortgage payments will be made, the lending institution must assume more risk. The higher the risk, the higher the interest rates they will charge, as they need to be paid back more for assuming greater risk. As a borrower, then, you need to prove to lenders that you can easily and reliably make your mortgage payments. How do you prove this? One way is by showing your financial assets such as savings, bonds, investments, etc. The second, and crucial way — as it will determine your trustworthiness — is by showing your income history, your credit history, and your income stability.
Usually, mortgage lenders look for about two years’ worth of proof that you have a stable income. This can be seen by showing both your personal and business bank account statements for the past two years. If you can show that you have a steady flow of income over time and a likelihood that this flow will be maintained, you should not have too much trouble getting a mortgage. Of course, having some assets to fall back on will also show you can be relied on to pay back your debts. Not sure if you have everything in order? Speak to one of our mortgage specialists who can help you check that you have all the proof that is required.
Ensure you have all the right documents
Speaking of proof, bank account statements aren’t all you need to show to get a mortgage. There are many other documents you need to show as well. To help you, we’ve created a handy list of the paperwork (pdf) or documents you will need to close the deal when it comes to getting a mortgage.
- Notices of Assessment: Whether you apply for a mortgage online or physically, your personal tax Notices of Assessment for the past couple of years must be included as part of your mortgage application. If you can provide your Notices of Assessment, you will most likely be able to get the same kind of mortgage as someone who is employed by a company or institution. Not sure if you will be able to provide your Notices of Assessment? As long as you have a good credit history and enough funds to cover 10% of the down payment, you will still be able to get a mortgage.
- HST or GST payment proof: Like your personal taxes, it is also important to show proof that your HST and GST payments are regular and up to date.
- Personal and business credit ratings or credit scores: Your credit scores are an indication of your credit history. So, it is vital that you show both your personal and business credit ratings or credit scores.
- GST Registration Number or License, Business Number or Business License, and your Article of Incorporation: Your GST registration number or license, business number, or business license, or your Article of Incorporation proves that your business is established and legitimate.
- Contracts of current clients: These are important to prove that you will continue to receive a steady flow of income in the future.
Maintain or improve your credit score
If you are looking to take out a mortgage when you are self-employed, having a good credit rating or credit score is a huge advantage. As mentioned above, your credit score is an indication of your credit history — that is, how well or poorly you have dealt with loans and lines of credit in the past. If you have missed credit card or loan payments, you will have a low credit score. If you’re prompt with credit payments and have proven that you can make payments on time, that is reflected in your credit score too, since you will have a high credit score and a good credit rating. Remember, mortgage lenders are looking at your trustworthiness as a borrower. A good credit score is one of the best signals that you are reliable when it comes to paying back your loans. So, make sure you maintain your credit score by always making any debt payments on time. If you need help improving your credit score, we may just be able to help.
Get smart about your taxes
When you are self-employed, you already know that you must be very particular about filing your taxes. This is doubly important when you are looking to apply for a mortgage. All your tax returns need to be up to date. You should have no tax arrears. This is one of the key things that any lending institution will check when you apply for a mortgage. While making sure you pay all your taxes — and pay them on time — is important, there is another thing you should keep in mind if you are looking to apply for a mortgage. That is your tax deductions. As someone who is self-employed, you may have tried to claim many expenses as business expenses to make the most of tax deductions. While this may be a smart move as it saves you on taxes, it is not smart when you are in the market for a mortgage. That’s because claiming too many expenses and tax deductions makes your income appear to be less. If your income is seen as less than it is, you may not qualify for the mortgage you really want. To qualify for a mortgage in a higher income bracket then, you should consider rolling back the expense claims and tax deductions at least two years before you apply for a mortgage. If you haven’t, please speak to a financial advisor on how you can put your best ‘tax’ foot forward when you apply for a mortgage.
Get your mortgage from a credit union
If you are already an Innovation member, you know we’re always here for you whenever you need us. You can speak to one of our mortgage specialists to find a mortgage that is perfect for you. We also offer low mortgage interest rates so you can rest assured that you will always get a favourable mortgage when you choose Innovation. If you are not an Innovation member yet, then you should know that a great mortgage is just the tip of the iceberg. With Innovation, you can also enjoy all the benefits of a No-Fee Bank Account, earn cash dividends every quarter for banking with us and even contribute to giving back to the larger community.
As you can see, applying for a mortgage when you are self-employed is really all about knowing how to prove you are a trustworthy borrower. That includes showing your assets and the correct documents, being smart about your taxes, and maintaining a good credit score or improving your credit rating. If you need any more advice about how to apply for a mortgage online or assistance to get your mortgage, don’t hesitate to speak to one of our mortgage specialists. We would be happy to help you in any way we can.