Mortgage Approvals for Self Employed Individuals
In the world of business ownership and side hustles, we seem to be engaging a lot more with individuals that are self-employed these days. Self-employed individuals face a different set of criteria when it comes to mortgage approvals. The applicant’s file usually goes through a stricter qualification review when compared to an applicant who is an employed by a company. For the mortgage lender it comes down to predictable income and overall risk as a self-employed candidate is subject to potential income fluctuations. In this blog, we wanted to share some common questions we are asked by individuals looking to get approved for self-employed mortgages.
What do I need to qualify for a self-employed mortgage?
In order to qualify, the case file (application) would typically include the items listed below. Another way to look at it is, how to put the lender at ease and reduce their lending risk. Here are the top 3 to have in order before application:
Solid credit score – just like a conventional mortgage, credit history payment and overall credit score can determine the final mortgage approval and most competitive rates. Generally speaking, a self-employed individual can expect a slightly higher mortgage rate. Having a solid credit score will allow for the mortgage broker in obtaining best rates similar to those of conventional applicants.
Proof of income – one of the benefits of self-employment is claiming expenses along the way (write offs) and declaring a lower income for tax purposes. This is variable every month and potentially there could be a month where a self-employed applicant has no income. That is all of concern for the lender and the application must firmly prove a steady income stream. Therefore the applicant would be subject to a review of the last 2 years of self employed income.
Notice of Assessment – sharing records for the previous 2 to 3 years will be required. The lender will be looking to see if your tax filings are in order and at current status. We have worked with several business owners that are at times 2 or more years behind in filings!
Other recommended paperwork to have in order to further improve the chance of approval would include some of the below:
Financial statements from your business to outline your overall income vs expenses
Business taxes owing at current paid status (paid in full to current year)
Bank statement(s) to prove the down payment is on reserve
How much down payment do I need for self-employed mortgage approval?
The down payment amount is very similar to that of a conventional mortgage these days. The minimum requirement is 5% if the applicants credit score and related criteria is solid. If the qualifying criteria is not as strong, then a 10% down payment is the typical recommendation. In both scenarios, the self-employed applicant would usually require default insurance. The default insurance amount would be added to the mortgage amount to determine the total monthly payment for the mortgage term. For individuals that can afford a 20% down payment, the need for default insurance can be removed, same as that of a conventional mortgage.
I have been successful in achieving mortgage approvals for many self-employed individuals across Metro Vancouver and Fraser Valley. With access and relationships with many quality lenders who are willing to take on self-employed mortgage applications, I will ensure we present your file with the pertinent details to cut through and improve your chance of approval.
I am always happy to discuss and review your employment situation to assess your approval chances. Feel free to connect with me anytime.
All the best,
Sukh Sangha