Trying to get a mortgage when you are self-employed can often feel like a struggle, especially when it comes to verifying your income. Lenders look at your credit report as well as your income to determine how high of a credit risk you may be. This means having to submit extra documentation in many cases. However, being self-employed doesn’t mean you can’t get a mortgage just like other homebuyers. There are options and programs available and our Alberta mortgage broker team is here to walk you through them.
Prime Mortgage Loan
A prime mortgage is based on your actual earnings. You are basically showing that you have paid yourself and that you have declared enough income for a 2 year period. This is a good option if you have good credit, can show that you have managed your debt really well, and your credit history goes back for at least 12 months. You’ll also need to make sure that you have properly filed your tax returns and don’t owe any money to the CRA. A lender will start by looking at Line 150, your stated income, on your tax return. You can qualify for up to 5 times your stated income in many cases.
For the Newly Self-Employed
What happens if you have only been self-employed for less than 2 years? Does it mean you can’t qualify for a mortgage? The short answer is no. CMHC offers a lending program aimed at those who have been self-employed for under 2 years or less. When you have worked for an employer for a few years and then move into self-employment, your tax return will show income that is much lower. The program from CMHC allows you to show what you could potentially make based on your bank statements and contracts for work, rather than relying on your tax return.
The CMHC program is only available with a maximum term of 25 years and purchases that are under $999K. You will also need to have good credit.
Stated Income Mortgage
This type of mortgage is best for self-employed people who have a gross income but has that income lowered due to expenses and aren’t able to meet the loan qualifications. Lenders will use a figure between your gross income and net income (lines 150 and 236 on your tax returns) and come up with what is called an “Income Reasonability” figure that helps you to qualify. In order to qualify for a Stated Income mortgage:
- The purchase price needs to be under $999K
- The property needs to be owner-occupied and not rented out
- You will need to make a down-payment of at least 10%
- 5% of the down payment needs to be funded by you and not fully gifted.
- You can’t have any late payments over the past 12 months.
- You must not owe the CRA any money and tax returns need to be filed accordingly
If your credit isn’t that good or you don’t make enough income to qualify for a traditional loan, you can use an alternative lender. With this option, you are able to use alternative ways to prove your income, such as with invoiced, bank statements, and work contracts. However, you will be charged between 0.5% to 1% more than with a traditional loan, are charged a closing fee, and the policies for appraisal tend to be stricter.
Financing Through Credit Unions
This option sits between traditional and alternative lenders. To qualify, you need to show them at least 3 months’ worth of business statements, 2 years’ worth of tax returns, and the interest rates on this type of loan are usually higher than traditional mortgages. You are also able to buy properties that are over one million dollars.
If you aren’t able to get approved for a mortgage through the above options, you could look into using a private mortgage lender. While private lenders aren’t as concerned about your taxes, income, and whether you owe money, they will charge a lot more and should really only be used as a last resort.
If you are self-employed and want to know what mortgage options you may qualify for, give our Alberta mortgage broker team a call today!