Accessing a mortgage when you’re self-employed
Are you aware of all the tools available to make income verification easier on you and your client? Are you looking for an easier way to help self-employed mortgage seekers?
As a broker, you really want to help your clients find the best possible mortgage, and those clients with non-traditional income sources can be a challenge. In particular, income verification can seem daunting to those who are looking for self-employed mortgage financing because they may not have consistent income or traditional income documents, such as a T4 or an employer letter.
Can a self-employed individual qualify for a mortgage?
Your client’s first question might be, “Can I get a mortgage being self-employed?” The good news is that, yes, they can. However, with the change in mortgage regulations over the last few years, it’s become increasingly difficult. The Government of Canada’s B-20 regulations require lenders to look more closely at self-employed income before financing, not only to prove the amount, but also the sustainability of income. Providing this proof requires more paperwork and numerous income verification documents.
This is an area where alternative lenders excel—they offer products suited to self-employed individuals, and they are willing to work with mortgage brokers to help their clients secure a mortgage.
What’s needed to qualify for a mortgage when self-employed?
The number of self-employed Canadians is approaching 3 million and growing, according to Statistics Canada. So, you will have clients asking how to qualify for a mortgage when self-employed. Traditionally, these clients would need to provide tax returns (personal and business), business income statements, bank statements, and other documents going back at least two years. In addition to proof of income, lenders also like to see that your client has been working in the same business during that time.
To ease this pain, some alternative lenders may follow a streamlined process that allows your client to complete a self-employed attestation form in lieu of providing pages of documents. Typically, this form allows brokers to calculate a client’s income with less paperwork. For instance, six months of bank statements and three invoices opposed to two years’ worth of lengthy documents to make calculations.
That’s not to say that your client won’t have to put in some work to qualify. Lenders certainly look at income, but debt servicing ratios, credit scores, and down payments are equally important factors. And when your client is self-employed, lenders will look at all three factors much more closely.
- Debt servicing ratios consider your client’s financial obligations and calculate how much your client can afford to borrow.
- The credit score is used to determine the borrower’s credit worthiness, such as credit history or timeliness of payments.
- Your client will also need to provide the source of their down payment. Most lenders require 20% or more from self-employed borrowers with no default insurance required.
While debt servicing ratios do not directly affect a person’s credit score, carrying a large amount of debt can negatively affect both. Advise your clients to pay down their credit cards and lines-of-credit before they apply for their mortgage.
Are mortgage rates different for freelancers and contractors?
Wondering if a self-employed mortgage rate is higher than other rates? Like any client looking for a mortgage, freelancers and contractors need to verify their income, have the down payment and fall within the approved debt servicing ratios. These clients may have to supply some additional paperwork, but the mortgage rate is affected more by a person’s creditworthiness than the type of work they do.
How long will it take self-employed clients to get a mortgage?
The better question is “how long must a person be self-employed to get a mortgage?” Because sustainable income is a factor, new business owners may have to wait until they’ve been in business for at least two years. But there are always other factors to consider. Maybe your client has worked in the same industry for many years before they started their own business. This is all part of the story an alternative lender underwriter will want to know.
Which is the best lender for a self-employed mortgage?
When choosing the best lender for a self-employed mortgage, consider both the products and the customer service.
Many lenders can, but won’t often choose to lend to the self-employed mortgage client–they see too much risk. This is where alternative lenders are leading the way. With more self-employed Canadians now than ever before, alternative lenders like Bridgewater Bank see the opportunity to serve this market. This allows brokers to help their clients get the mortgages they want at fair rates.
If you have self-employed clients who could use a little flexibility, contact one of our business development managers. We’re always available to provide you with expert advice.