Understanding company financials: Verifying income for your self-employed clients
With self-employment on the rise, mortgage brokers should know how to accurately interpret the information in company financials and income verification documents.
For self-employed clients looking for a mortgage, proving income is more involved than providing a T4 and a letter from an employer. You’ll need to look at both personal and business documents when putting together their mortgage application. Income verification is more complicated for your self-employed clients because there are so many variables to consider.
Documents your underwriter may ask for to prove your client’s income
You’re no doubt familiar with more traditional income verification documents, such as T4s, T5s, Notices of Assessment (NOA), and T1 General Tax Forms, because you see them regularly.
For your self-employed clients, the income verification documents an underwriter might request will depend on the structure of your client’s business. Becoming familiar with these documents will help you and your client understand why they are necessary and what the underwriter is looking for.
|Sole Proprietor or Partnership||Incorporated or Limited Company|
In addition, your underwriter may ask for contracts your client has that show their future income potential.
More information on reading financial statements is available in this great article by the CPA. It answers many questions you might have about how different types of businesses prepare their financial statements.
What to look for in company financial statements
Every company’s financial statements look a bit different, depending on the complexity of the business. Accountants are responsible for putting together the financial statements based on a complex set of accounting principles. While you don’t need to understand how a company’s financial statements are created, you do need to know what to look for to verify your client’s income.
It’s a great idea to talk to your business development manager as you go through the company financials. They will help you identify the information you need for the application package and help you assess where to use add-backs and gross-ups.
The three main documents we recommend you look at to assess the financial health of the business are:
- Income statement
- Balance sheet
- Statement of retained earnings or statement of shareholder equity
See our cheat sheet below.
|Document||Description||What to look for|
|Income statement||The income statement lists revenue and expenses for a defined period, such as a fiscal quarter or year. Subtract expenses from revenue to determine if the company is making a profit or losing money.||Look at the revenue, operating expenses, and net income. Compare the numbers over a couple of years to get an idea about the company’s growth. Net income is the bottom line. It should be stable or growing year over year. If it’s not, explore the reasons with the client. Are revenues down? Were there some unexpected expenses or some capital asset purchase?|
|Balance sheet||The balance sheet shows a company’s assets, liabilities, and shareholder equity (net worth) at a moment in time.||Look for total assets, total liabilities, and shareholder equity. Assets should be greater than liabilities. Shareholder equity is a measure of net worth.|
|Statement of shareholders’ equity (statement of retained earnings)||The statement of shareholders’ equity shows how owner equity changed during the fiscal period. For a self-employed business owner, changes will likely be due to retained earnings. It also reflects shares sold or purchased.||Shareholder equity should be stable or growing year over year. If equity is decreasing, explore the reasons with the company owner.|
An alternative mortgage can benefit your self-employed clients
Alternative mortgage lenders are willing to look beyond traditional income sources, and they are experts at reading company financials. This makes them an ideal lender for your self-employed clients. We know your incorporated clients make more money than what is claimed at tax time, this is common knowledge and savvy tax practice.
Simply put, there are several acceptable ways to prove income and your BDM will help you understand the best and quickest way for your client to do so. Your BDM will also help you identify any gross-ups or add-backs that will help your client with the approval. Learning what to look for on these documents can be overwhelming. We’re here to help.
Bridgewater Bank offers The Gateway Self-Employed Mortgage™ specifically for your self-employed clients.
If you have questions about how our mortgages can help your clients, contact us and talk to one of our underwriters or business development managers.