Being self-employed has several advantages. You get to be your own boss, control your time and work on your own business. If you’re dreaming of self-employment, you’re not alone. According to statistics, 15% of total income earners are self-employed.
Yet, self-employment also has its own hurdles. Your income may not be as consistent and the hours can be long when facing obstacles and challenges. When it comes to achieving your personal goals, such as buying a home, there are some things you should be aware of when it comes to applying for a mortgage, such as your cash in the bank, your credit and income.
How to get a mortgage if you’re self-employed
An individual’s considered self-employed when they work for themselves through securing contracts and servicing clients. They don’t work for an employer and typically don’t earn a fixed income.
Some examples of those that earn income from self-employment are business owners, commission-based sales people, freelancers, farmers and fishers among others.
Mortgages for self-employed individuals apply to borrowers who rely on business income rather than employment income. Mortgages for self-employed individuals differ from traditional mortgages. Some borrowers may have lower mortgage rates and may have a lower down payment requirement.
There are multiple types of lenders that offer self-employed mortgages. Keep in mind that not all lenders are the same. For instance, “A” lenders tend to be more strict when it comes to mortgage qualifications for self-employed individuals, as compared to “B” lenders or private lenders.
Applying for a mortgage as a self-employed individual
When applying for a mortgage as a self-employed individual, there are criteria that you’ll need to meet in order to qualify.
With all mortgage applications, lenders will always take a look at your income. Traditional mortgages may offer lower rates. Non-traditional mortgages may offer higher rates depending on income verification.
Mortgage default insurance
Mortgage default insurance, also commonly referred to as CMHC insurance, protects the lender should the borrower default on their mortgage. Mortgage default insurance is required on all mortgages with down payments of less than 20%, which is known as a high ratio mortgage. Borrowers with a down payment of 20% or greater are considered as conventional mortgages.
Factors that’ll help you get approved
A high credit score, down payment, lower debt-load and proof of income with accurate business records are some of the factors that’ll help you.
1. Credit score
Regardless of the type of mortgage you’re applying for, as a self-employed individual, your credit is crucial.
2. Down payment
The larger the down payment, the less risky it is for the lender. Larger down payments means smaller loans, less interest and lower monthly payments.
3. Existing debt
Paying off existing debts from creditors, such as pay-day loans, credit cards, utilities and more will increase your chances for a better mortgage.
4. Self-employment income
Proof of self-employment income is very important. Be sure to have the proper paper trail to verify your income.
5. Accurate records
Outdated or inaccurate business and tax records will definitely affect your credibility. Be sure to have valid and up-to-date business registration and corporation documents, etc.
Get approved for a mortgage
As a self-employed individual, it’s highly recommended to work with an experienced mortgage broker. Mortgage brokers work with a variety of lenders and can assess your financial situation. In this way, you can increase the chances of getting approved for a mortgage since you’ve an expert on your side.
Based just outside of Toronto, Daisy Raouph’s an experienced mortgage broker and financial security advisor with over 30 years of experience in financial services. Consult Daisy today to review your mortgage financing options.