A mortgage has the most direct impact on your lifestyle. When you know how mortgages are evaluated, it can help you get into a better mortgage especially if you’re self employed.
Here are five important criteria that mortgage lenders use to evaluate mortgages, and some tips to help you get the best possible mortgage you can qualify for!
Capital: The down payment or existing equity
In all purchases the more money placed as a down payment, the better. For individuals who can’t confirm their income but have stellar credit, you will need a minimum down payment of 10% to get the best mortgage rates. There are lending programs that will allow borrowers to state their income based on what’s reasonable in their industry. Otherwise, most self-employed programs require a minimum or 20% down payment or equity.
Credit: Your track record
To maintain a good credit score it’s best to pay bills on time, even if you’re making only the minimum payment. For self-employed people, a higher credit score means less weight is placed on income verification and a better rate. However if you’ve had credit challenges in the past there are still good options for alternative financing that can help repair your credit. These mortgages are often shorter term such as one or two years to allow you to get over a weak credit history.
Collateral: The state of property
A good location and a solid property are key features mortgage lenders look for. In a self-employed situation where income can’t always be confirmed, the property should be highly marketable. Properties in rural areas that are on well and septic systems have limitations as you can normally only refinance them to 65% of the value OR require that you put at least 35% as a down payment if you are purchasing.
Capacity: Your ability to pay
Capacity is often difficult to prove with self-employed people and refers to the client’s ability to pay, which is often proven by T4’s, NOA’s, and a job letter. If you have strong gross business income but only show little on your personal income taxes, some mortgage lenders will consider gross income. The most important part of capacity is to ensure you have all income taxes paid.
Paying your income taxes on-time is really helpful, but there are options if you’re behind:
Many people are turning to self-employment as a way to have better control over their financial future but many people who are self-employed also forget that they need to save money to pay their income taxes! If you find yourself in a situation where you owe Revenue Canada money, you’ll want to pay it as soon as possible as it can affect your credit and your business. If your bank has turned you down for a mortgage because you have outstanding income taxes, there are still good options with alternative mortgage lenders to bring your taxes up-to-date.
Character: Stability is king
Mortgage lenders like to see trends in a person’s job stability, and job stability within a specific sector is often more important than staying at the same company for any period of time.
One of the things that I’ve learned is it’s more and more challenging for self-employed individuals to get mortgage financing. Whether you’re renewing your mortgage or buying a property speak to us as we’re helping self-employed individuals get good mortgage options! /contact-us/