How To Get A Mortgage if you are Self-Employed
According to various statistics, nearly 20% of the income-earning population in Canada is self-employed. It’s no wonder that it is difficult for self-employed individuals to obtain mortgages because of the lack of formal proof of income. This is a significant source of concern for many lenders that you won’t earn a steady source of income to make monthly payments while others don’t want to deal with additional documentation that is involved while giving funds to a self-employed person.
Who is Self-Employed?
Maximize Your Chances of Getting A Mortgage Approval
Establish A Track Record
If as a self-employed person, you have a proper track record of the estimated profit and losses of the business, lenders will be more willing to deal with you. You should have at least two years of track record backed by proper tax files. A stable and increasing source of income in the records is more likely to attract lenders.
Lower Your Debt-To-Income Ratio
Increase your chances of getting approval for a self-employed Mortgage by lowering your debt-to-income ratio. This can be done by increasing sources of income and by lowering your debt.
The easiest way of optimizing the debt-to-income ratio is to shop at a price less than what the mortgage calculator suggests.
For example:
If the mortgage calculator suggests keeping the budget at $4,50,000 try to keep it at $400,000. It will provide you with more flexibility if you have to bear sudden expenses.
Increase Your Credit Score
A credit score is a measure of how likely a person is to repay a loan or other debt. How can you increase your credit score?
- Pay your bills on time and in full.
- Keep your balance low by paying off your debts in full every month.
- Avoid using any new credit card.
- Pay outstanding balances on existing cards.
- Make sure you don’t have late payments or default judgments against you.
Pay A Large Down Payment
Down payments are typically made as part of the purchase agreement when buying property. The buyer pays this amount in order to ensure the lender that you are less likely to default. It is recommended to put a down payment of 20% of the total loan amount. It is typically used to cover closing costs, such as appraisal fees and credit reports.
Have Significant Emergency Funds
If you have a significant amount of money as emergency funds in addition to making large down payments it shows lenders that you can manage your monthly mortgage payments in case of any financial crunch.
Having significant funds can also cover homeowner insurance, property tax, and any repair cost that may come in the future.
Get Out of A Consumer Debt
The fewer you have consumer debt payments the easier it will be for you to qualify for a mortgage. It proves to lenders that you have more cash flow now and they can even give you a higher loan amount when you pay off your Land Loan and credit card due.
Provide Complete Documents
Proper and complete documents like balance sheets, profit, and loss statements, and tax returns of the previous year increase your chances of getting approval and getting fewer interest rates.
Apart from this, lenders can also ask for additional documents like
| A list of debts. | List of assets you hold. | An additional source of income if you carry one like Alimony, social security, etc. | Evidence of your self-employed status like a statement from your accountant, license, or letter from the client. | Evidence of mortgage payment. |
Mortgage Solutions For Self-Employed:
If as a self-employed person, you haven’t qualified for a conventional mortgage because of the presence of strict approval rules. Lenders can provide you with some other mortgage solutions too.
FHA Loan
A federal housing administration loan is issued by an FHA lender. They are designed to meet borrowers' needs in the low to middle-income group range as they require a low down payment of as low as 3.5%.
As FHA loans are guaranteed by the federal government which means that lenders are protected in case the borrower defaults on the loan. Individuals can qualify for FHA loans at lower interest rates and even if they don’t have a sufficient credit score that would otherwise be quite difficult with conventional loans.
Although despite all these advantages it is essential to note that it comes with other significant costs like higher mortgage insurance premiums.
Bank Statement Loan
In this type of financing lenders look at your 1 to 2-year back bank statements in order to understand your financial situation. It gives an advantage over the traditional method where you have to show various documents like tax returns and W-2s.
In this case, as the lender is carrying more risks so the interest rates can also be comparatively higher.
Joint Mortgage
Applying for a joint mortgage with a W-2 employee is another attractive way for getting approval easily if you are self-employed. In this case, your companion can be anyone like your spouse, trusted friend, or relative who will share the ownership of the house. However, your partner also needs to have good credit history and a low debt-to-income ratio in order to qualify for financing.
Get A Mortgage With A Co-signer
A co-signer is someone who agrees to be liable for a debt in the event that the original debtor cannot repay it. The co-signer would then take over your loan and repay it as well as any interest owed. A co-signer can be anyone like your parents or your Relatives who are willing to take full responsibility.
Are These Mortgages Expensive In Nature?
Self-employed mortgages may not be expensive in nature if you have properly shown your creditworthiness and got the best deal by comparing the multiple lenders and their interest rates.
Alpha Mortgage House Corporation is a Mortgage Broker in Surrey, BC. We provide mortgages for Home Purchases, Project financing, Second mortgages, Commercial mortgages, Mortgages for first-time home buyers and more. Alpha Mortgage is a one-stop solution for all your mortgage needs. Our team works with top lenders to provide you with the best financial options.