How to Beat the Self-Employed Mortgage Blues

Summary
This article:

Describes special self-employed borrowing issues.
Details the documentation self-employed individuals must provide lenders.
Shows how self-employed people can maximize their ‘borrowing’ income
Many lenders today specifically target the self-employed market with highly competitive terms and rates. Let’s look at some key points and smart strategies for self-employed borrowers.

Reviewing your credit history
You should be aware that as a self-employed applicant, your credit history is crucial. This is because lenders place greater emphasis on your repayment history than your current income (which, to the lender, is less reliable than for employees). It’s definitely worth your time to ensure that your credit report is ‘clean’ and correct by requesting it from a credit agency such as Equifax. With a solid credit history, a self-employed borrower can buy a property with only a 5% down payment.

Establishing Self-Employment and Tax Status
You’ll need to establish a minimum of two years of self-employment by supplying the lender two verifying documents (e.g., business license, GST documentation, articles of incorporation). In addition, you’ll need to produce a recent CRA Notice of Assessment that shows no outstanding income taxes owing.

Maximizing Your ‘Borrowing’ Income
The way self-employed individuals track income and expenses for tax purposes poses challenges when it comes to borrowing. Typically, self-employed people reduce their taxable income as much as possible by claiming business expenses. While that’s great for minimizing taxes, it’s not so great for showing maximum ‘borrowing’ income to a lender.

In the past, this meant that many self-employed individuals weren’t able to borrow on favorable terms, or at all. Fortunately, lenders now routinely approve mortgages based on your stated, rather than your taxable income. And, if you have a 25% down payment, they will not usually ask to verify your taxable income and tax-filing status. Work with a mortgage consultant to maximize your ‘borrowing’ income, in the same way you work with an accountant to minimize your taxable income.

Scott Travelbea