Securing Your Mortgage As A Self-Employed Borrower

Securing Your Mortgage As A Self-Employed Borrower

If you’re an entrepreneur looking to buy a home, you may need to meet additional requirements to qualify for a self employment mortgage. However, here at Prime Mortgage works we specialize in mortgage lending for self-employed borrowers. We’re going to discuss everything you need to know for a self employment mortgage and the benefits of working with your Victoria mortgage broker.

Here’s what you need to know to improve your chances of a successful self-employed mortgage application. 

Is it Difficult To Get A Mortgage When Self-Employed?

Getting a mortgage when you are self-employed can be challenging but it certainly isn’t impossible. It can be more challenging to get a mortgage because you need to prove you have reliable income. There isn’t a specific product called a self employed mortgage, you will be applying for the same mortgage as everyone else. The difference is that you’ll have to provide more evidence of your income when you are self-employed. This can include a T2125 as well as the TD1 General Sample

Self-Employed Borrower Definitions

Mortgage lenders have different rules to determine if a borrower is employed or self-employed.  When determining the appropriate qualifying income for a self employed borrower,  it is important to note that the structure of a business depends on the type of business. Lenders will view you as self-employed if you have an ownership interest of more than 25% of a business from which you earn your income as an Individual, partnership (general or limited) and/or a corporation.  Let’s take a look at the borrower definitions below in more detail.  

  • Running a business as a sole proprietorship, with a partner, or corporation.

A sole proprietorship is a business that is run by one person and is not registered or incorporated. For tax purposes, the owner and the business are the same, so the owner reports their business earnings on their personal tax return.  

Partnerships are formed when two or more individuals or corporations come together to run a business. 

Corporations require more than just fulfilling the day to day of business responsibilities. Corporations must also hold shareholder and director meetings, keep records, minutes, and document major decisions. 

  • Receiving 25% or more income from your business.

Most lenders require applicants to have less than 25% ownership in a company to use their basic income and be treated as employed. When a borrower has ownership interest equal or greater to 25% in their company they are treated as self-employed. 

  • Your income is commission-based.

You can get a mortgage if your income is commission based. However, lenders may have different ways of looking at your commission based income. Some lenders may use all of your commission income for affordability, while others may only use 50%.  Some lenders may also cap the acceptable income if it is higher than your basic salary.  

  • You work short contracts for multiple employers.

If your business or employment is based on fixed-term work contracts, this will not prevent you from getting a mortgage. A fixed term contract work mortgage is a type of loan designed to accommodate individuals whose work is derived from employment contracts vs traditional permanent business employment.  

Documents You’ll Need As A Self-Employed Borrower

Self-employed people often worry about applying for a mortgage because they’re unsure what documents mortgage lenders will accept. What exactly do you need to prove your business is viable and your income will cover your mortgage repayments?  

Self-employed applicants need to verify and document their income to apply for a mortgage. You will need to provide documents such as tax returns, bank statements, proof of income, balance sheets and more depending on the lender. Let’s go over some of those in more detail:  

Monthly Bank Statements

Each lender will have their own requirements but, typically a lender will ask for the last 3-6 months bank statements to evaluate your financial habits, average salary, and any major expenses you may have.  Mortgage lenders will want to see the bank statements of both the business and your personal accounts. 

Tax Returns and TD1 Forms

We all know what a tax return is but what is a TD1 form? Simply put a TD1, personal tax credits return, is a form that is necessary for calculating how much tax should be withheld from payments, giving the best estimate of your personal tax situation. 

Business Balance Sheet

To get a self-employed mortgage, you must be able to prove both your business profits and your individual income. Most lenders want to see 2 years worth of accounts, though some may work with only 1 years documentation for new businesses. 

Business Credit Card Statements

If there’s evidence of heavy credit card usage, the lender may also want to check your credit card statements, it is always a good idea to reduce or clear your credit card balances before applying for a mortgage if you can. 

Reference Letters from Financial Institutions

Basically this is a financial letter of reference. It’s a document from your bank, or other financial institution, that explains your financial history.  Lenders may ask for a mortgage reference letter to prove your income.  Additionally a credit reference letter can help you get approved for services based on your history with other service providers. The reference provider basically is vouching for you, which makes other lenders more comfortable extending credit to you.  

Not sure how much you’re eligible to borrow? Use our easy online mortgage calculator as a general guide. 

Benefits of a Self-Employed Mortgage

If you’re self-employed, the journey to home ownership may seem daunting due to your unique financial circumstance. The good news though is that self employed mortgages provide tailored solutions to accommodate entrepreneurs. Unlike traditional mortgages that focus on steady employment income, self-employed mortgages take into account your unique income streams, offering more flexible criteria to suit your financial reality.

There are lending institutions and incentives designed just for the self-employed. Lenders understand that self employment comes with its challenges and rewards. As a result, self-employed mortgages feature more flexible underwriting criteria that align with your entrepreneurial journey. Let’s discuss a few of the benefits further. 

Your net worth holds a great value to a lender

Net worth can actually matter more than an income statement. Self-employed people can often face difficulties obtaining a conventional mortgage. Instead of relying on traditional income, borrowers can demonstrate that they possess adequate assets to support the mortgage. 

Assets that commonly meet mortgage requirements include checking and savings accounts, stock and bonds, mutual and money market funds, income from investments and vested retirement funds. Annuities can qualify as well as some pensions. For borrowers who possess substantial qualifying assets, asset utilization can be an excellent financing option for self-employed mortgages. 

There’s more flexibility in how your income is calculated and reported

The advantages of self-employed mortgages go beyond flexibility: self-employed mortgages acknowledge the fluctuating nature of your income, allowing for a broader range of income sources to be considered. If you’re a newcomer to the world of self-employment, don’t worry, self-employed mortgage solutions consider projected earnings, business potential, and industry expertise to make home ownership achievable for newer ventures.  With lenders considering various income sources, self-employed mortgages can potentially allow you to borrow more than a traditional mortgage would, giving you more flexibility in your property choices.  

Secure Your Victoria Mortgage As A Self-Employed Borrower

Each mortgage provider has their own lending criteria when it comes to assessing self-employed borrowers. Partnering with a mortgage broker in Victoria who specializes in self-employed mortgages can help you find not only the best deal on the market and minimize the complexities and hassle involved in the process. A mortgage broker helps you manage the expectations from the start, helps to determine what you will be able to borrow, and helps you prepare your application so that you have the best chance of being accepted. Mortgage brokers also have connections to far more lenders than you can on your own as well as have access to better rates with their bulk mortgages with lenders. 

Contact Prime Mortgage Works today to learn about securing your self-employed mortgage in Victoria. Book a free consultation online today.

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