Self-employed? Five tips to help you qualify for a mortgage
Self-employment is more common today, but if you're self-employed, getting approved for a mortgage can be difficult.
As a self-employed person, it’s in your best interest to minimize your reported income so you pay less tax. Unfortunately this can work against you when it comes time to apply for a mortgage. The lower your income, the less you typically qualify for when applying for financing.
So what can you do to help yourself get approved?
Provide income validation
It’s important to know that the Canada Mortgage and Housing Corporation (CMHC) no longer insures self-employed mortgages without income validation. For many self-employed, this insurance is required.
According to the CMHC, income validation documents include the previous two years’:
- Notice of Assessment
- audited financial statements
- unaudited financial statements prepared by an independent third party
Some financial institutions will also accept Statements of Business Activities. Having this information available when you apply can strengthen your application.
Support your mortgage application with a strong credit score
Your credit score is another important consideration. Pay your bills when they’re due, keep your credit obligations clean and your credit score as high as possible. You should also resolve any credit issues before you apply.
Filing your taxes on time, and paying taxes owed, is also important, especially because your Notice of Assessment can be used for income validation.
Reduce your debt-to-income ratio
The higher your debt, the larger the portion of your income needed to service it. As your debt-to-income ratio increases, your ability to cover your payments falls. Lowering, or keeping your debt low by paying off some smaller loans may help you qualify for a mortgage.
Have cash reserves on hand to cover mortgage payments
Finally, it’s no secret that income for self-employed individuals can fluctuate. Contracts and available work can vary, and there may be periods of time when incoming cash is reduced. Building two months, or more, of mortgage and other bill payments in cash reserves may help you qualify.
Get help from your credit union
For self-employed workers, a credit union may be your best option for mortgage approval, because we can often be more flexible than banks in structuring your mortgage. We understand you incur extra costs to earn income, and we will typically add an extra 15% to your reported income when calculating your mortgage eligibility. Doing this helps you qualify based on a more accurate picture of your true earning power.
Our mortgage specialists can give you valuable guidance and insight so you can:
- Apply based on your true earning power.
- Get a competitive mortgage rate to maximize your purchasing power.
- Finance the purchase of a new home, renew your existing mortgage, or borrow against your home equity.
- Qualify for a mortgage of up to 95% of your home’s value.
- Select the appropriate mortgage solution based on your circumstances, with potential extended amortization periods: With a down payment of 20% or more, choose a mortgage repayment period of up to 35 years. With a down payment of less than 20%, choose a mortgage repayment period of up to 25 years.
Contacting a financial advisor at your credit union is a great place to start, and developing a long-term relationship with your credit union can help. The more we understand your business and finances, the better we can understand your ability to service your debt and get you the mortgage you deserve.