With mortgage rules tightening up, it will be more difficult than ever for self-employed individuals to qualify for a mortgage.
Here are some suggestions to help you get your ducks in a row for a mortgage:
Credit rating
You may have a thriving business, a great down payment and plenty of income to qualify, but if you have poor credit, it becomes more challenging for approval.
If you do end up qualifying with credit issues, then you have to be prepared to pay a higher interest rate. The difference between the best mortgage rates and those available to clients with credit issues can be very significant. This makes for higher monthly payments and more interest paid over the term of the mortgage.
In some cases, the only option would be a private mortgage with high interest rates and fees attached. These types of mortgages are only for a short term (usually between one and three years) with the goal of getting your credit back on track and switching to a standard mortgage lender at the end of that term. Even though having poor credit may be more costly than good credit initially, you can still get into home ownership and start building your net worth (instead of throwing your money away in rent).
The quality of your credit rating, or “scores,” depends on several factors such as:
- Current credit balances (try to keep the balances as low as possible or pay off each month)
- Amount of credit available (having too much is not the best)
- Late payments (how many, how late, how recent, what type of account)
- Recent inquiries about your credit
The last factor is one many people don’t know about. Try to avoid multiple credit checks before you go for a mortgage. As someone who’s self-employed, you probably rack up quite a bit on your line of credit and credit card for business purposes, and that’s understood. But avoid going for new loans. Before you try to get a mortgage, don’t go out shopping for a new car or furniture and have salespeople all over town running credit checks on you, as this will only lower your score.
If you want to have the highest scores possible — which will allow you to qualify for the best mortgage rates — make sure all payments are made on time and avoid having your credit checked too often.
Read Matthew Chan’s 2-part series on how to improve your credit here.
Downpayment
All other things being equal, the larger the downpayment, the stronger the application will be.
A larger downpayment will not only give lender more equity in the home in the event of a default or foreclosure, it also gives lender more confidence that you can save and manage money. A large downpayment also gives evidence thatyou’re generating good cash flow in your business.
In the past, if a client had 35% or sometimes even 25% down, there was almost always a way to get the mortgage done by either a big bank or a smaller lender.
Now, even with 35% down, it is not a guarantee. Lenders are just tighter on underwriting, and even with a substantial downpayment, they want to know/understand how the client will still pay the mortgage. They will ask these questions:
- What do yout do for a living?
- How much do you have in net liquid assets?
- How will you ultimately service the mortgage?
With that in mind, you’ll want to be prepared with answers they want to hear.
Have paperwork organized and prepared
Lenders are moving more toward “reasonability” tests when assessing mortgages. To increase your chances of obtaining a mortgage and to decrease the turnaround time for getting your mortgage approved, you should get your paperwork ready for review. Here is a list of paperwork that you can expect to have ready:
- Complete tax returns and personal notices of assessmentfor the past two to three years: lenders want to review this for the following reasons:
- Ensure all personal taxes are current and paid (if not, you should have this handled by the time you apply for a mortgage).
- Review what income is reported for tax purposes and assess how reasonable is the gap between the reported income and the “stated” income. If someone is stating their income to be $150,000 and they are reporting $30,000 in income, the lender would want to review why there is such a big gap and whether or not the gap is reasonable
- Review the state of business income activity in the tax return to ensure the business reported for tax purposes is consistent with the application
- Proof of business documents:Lenders would like to review paperwork that proves the business has been operating consistently for a period of time. Documents that can help prove this include:
- GST/HST returns
- articles of incorporation
- business license
- financial statements prepared by an accountant (i.e. CA or CGA)
- Proof of assets: Savings and investments corroborate your stated income claims. For example, if someone claims to earn $100,000 per year but has no savings or investments, the stated income doesn’t sound credible. Assemble documents that show you have savings and liquid investments:
- bank statements for savings
- investment statements for stocks, mutual funds, bonds, GICs etc.
In today’s restrictive lending environment, a lender is going to examine your application thoroughly, so make sure you put together a package that says, “I’m credit-worthy.”
An independent mortgage broker will also help you find the best mortgage rate and the terms that fit your business and personal needs.
See also: The State of Stated Income
Matthew Chan
