Home buyers who are self-employed may face many added challenges when applying for a mortgage. Before 2012, applicants with a credit score of 680 or higher and a high enough stated income could expect to get approved for a mortgage. Since the government tightened lending rules with Guideline B-20, it has been increasingly difficult for self-employed applicants to provide adequate documentation for lenders and secure the best mortgage for their situation. B-20 called on banks to look more closely at incomes before approving a mortgage application.
For self-employed applicants, proving income can be difficult, as they typically lower their taxable income by maximizing business expenses and personal deductions, creating a discrepancy between tax returns and actual earnings. While some lenders still accept stated income declarations, B-20 only allows them to borrow up to 65% of the purchase value without requiring default insurance.
What can self-employed applicants do?
If you are self employed, the first thing you should do when looking to purchase a home is call a mortgage broker. A mortgage broker will discuss your options with you, and will tell you exactly which documentation you will need to be ready to provide. Some documents may take a lot of time to provide, so it is important that you talk to your mortgage broker as soon as possible so that you have enough time to gather all necessary documentation.
There are some documents most banks will expect of self-employed applicants. Bank statements, previous two years’ tax returns, and business documents may be expected. Notice of Assessments for the previous two years should be available and if there was a balance owing to Revenue Canada for the last tax year, that should be paid and proof of payment should also be provided. As noted above, it is important to recognize that lenders will be looking at declared income more closely and how that compares to the income that the client is stating, and less discrepancy between these two amounts is preferred.
All applicants, especially those who are self-employed, should be sure to pay down debts and maintain a high credit score, and have as big of down payment as feasible, to make their application more attractive to risk-averse lenders.
I specialize in helping self-employed applicants secure the best mortgage for their situation. Call me today to discuss how I can help you!