Common Misconceptions
There are a lot of misconceptions when it comes to mortgage qualification for a small business owner or sole proprietor, and there are certainly things to be aware of, but not hard rules by any means. Some of them include:
- You can’t get a mortgage without a traditional employment history. Nope.
- You need to have a perfect credit score to qualify for a mortgage. Nope.
- Self-employed individuals can only qualify for high-interest mortgages. Nope.
Prior to getting into mortgages I ran own business for over 20 years: when it comes to getting a moving or refinancing I’ve “been there and done that” and am here to help you through the process. Want to connect now? Contact me here and/or book a call.
Reality
You may already know that self-employed individuals declare income differently. Accountants often aim to minimize taxable income and reduce taxes owed. This can mean a lower reported income, making getting approved for a mortgage harder. Fortunately, many lenders understand this and offer special programs to help these individuals qualify for larger mortgages. As a mortgage professional with access to over 30 different lenders, I specialize in helping self-employed individuals land the mortgage they need. Everyone’s situation is as unique as their business. We will look at the whole picture to determine which lender best suits your needs and which program will give you the best options to increase your mortgage capacity. Some of the available options include:
- Addbacks or Gross Up – Let’s talk about the easy route, using your last two years’ NET income to get you qualified. We can either gross up your net income by 10-20% (lender specific) or ‘Add Back’ eligible business expenses to increase your net income. If we can make this work, it gives you access to all the lenders.
- Stated Income Program – This allows us to “state” your income. Lenders will look at your gross and net income, and we can state a reasonable income somewhere between the two.
- Net-worth Program – If the first two options don’t work and you have a high net worth, we can use lenders who will use your verifiable liquid assets to boost your income for qualification.
- Net Income After Tax Program – Have a moderate personal income and some income in your operating companies too? This program allows us to use your NIAT (Net Income After Taxes) to help you qualify.
- Projected Income Program – Physicians, dentists, veterinarians, and optometrists can use projected income as their earnings versus actual earnings, knowing they will eventually reach the earning level.
- Bank Statements Program – This program allows you to qualify by annualizing your deposits for the last six months and backing out minor expenses. We then can use that income to qualify you.
With the right approach, preparation, and lender, none of these need necessarily be roadblocks.
Proving Income
Instead of a consistent pay stub, self-employed individuals often have varying income sources, such as business profits or freelance earnings. This can make it challenging to meet the income verification requirements set by lenders. However, there are alternative ways to demonstrate income stability. Some of the documents that will be asked for may include (specifics will depend on your specific business and requirements):
- Notice of Assessments: Providing your Notice of Assessments (NOAs) from the Canada Revenue Agency (CRA) can substantiate your income claims (2 – 3 years). NOAs confirm that your tax returns have been filed and assessed by the CRA, giving lenders confidence in your income documentation. If you have online access to your cra account you can download these directly
- Income tax returns: At least two years of personal and business income tax returns is a standard requirement (T1s, T2s).
- Business financial statements: 2 years of audited financial statements, prepared and signed by a Chartered Accountant (CA).
- Bank statements: Providing your personal and business bank statements can help verify the consistency of your income. Lenders may analyze your deposits and cash flow to assess your ability to make mortgage payments.
While self-employed individuals may face additional challenges in income verification, utilizing these alternative methods can strengthen their application and increase their chances of mortgage approval.
Other Documentation
Other documentation that might be required could include:
- Business License.
- GST / HST Return Summary
- Business Credit Report
- Confirmation via public business registry
Tips
- First, have a quick chat with me to determine the income you need to show to meet your desired mortgage amount.
- Then, discuss these details with your accountant, as they can suggest ways to safeguard or improve your mortgage capacity. One potential way is to defer write-offs. It’s important to keep in mind that your income from the last two years will be used to qualify you.
- Self-employed individuals need to plan ahead when seeking a mortgage, ideally looking two years into the future.
Navigating the mortgage application process as a self-employed individual can be overwhelming, and as a business owner or sole proprietor it can certainly seem like there are more hurdles to jump over. This is where working with a mortgage professional can make a difference, where we act as an intermediary between you and the lenders, helping you to find the best mortgage options. Contact me here or book a call and we can work together to get you the best mortgage for your unique situation.