If you’re self-employed and are having trouble getting approved for a mortgage through one of the big banks or trust companies, you’re not alone. Over the years, traditional lenders have implemented a number of very strict lending rules, and banks have cracked down on mortgages for self-employed entrepreneurs with no reportable income.
This has become extremely frustrating to applicants because they may have a real estate deal pending a financing condition, but the banks are just saying “no” because of new tighter rules. This is where private lenders come in to help get you the self-employed mortgage loan you need.
How stricter lending rules affect self-employed Canadians
Reduced amortization periods. Entrepreneurs are considered risky. Higher down payments of up to 30%
In addition to reducing the amortization period and raising the minimum down payment required to purchase a home, in 2014, the Canadian Mortgage and Housing Corporation (CMHC) discontinued mortgages for self-employed Canadians and contractors without third-party validation. Before that, self-employed Canadians and contractors only had to state their income. Not anymore.
This squashed the homeownership dream for hundreds of thousands of Canadians. That’s because 2.76 million Canadians are self-employed, a whopping 15% of the country. And more and more Canadians step into the ranks of the self-employed every year.
Unfortunately, the big banks don’t really respect entrepreneurs and view them as risky. Because you are a self-employed entrepreneur and might draw a smaller income for tax purposes, the bank thinks there’s a greater chance that you’ll default on a mortgage.
Mortgage Options for Self-Employed Individuals
Obtaining a self-employed mortgage loan may feel like a struggle, with most bottlenecks involving income verification. In approving a loan, lenders examine your credit score and income to determine your risk level. However, just because a large financial institution may not approve you doesn't mean there aren’t options.
Conventional Loans
Conventional loans (conforming loans) are mortgages for self-employed which can be bought by Fannie Mae/Freddie Mac. Freddie Mac and Fannie Mae qualify self-employed individuals after a minimum of two years of employment or one year of employment plus a documented history of two years of earnings of comparable income in a similar role.
These qualifications demonstrate a strong history of payment to lenders.
Conforming loans also require the following:
- Three percent down payment (minimum)
- 620 credit score
- Below 45% debt-to-income ratio
- The loan amount must be within conventional loan limits
If you have good credit and have obtained a moderate-large down payment of between 10–20%, then this is an affordable option.
Bank Statement Loans
These non-QM mortgage options for self-employed and business owners are based on cash flow instead of tax returns. Lenders will assess your income by examining 12–24 months of business and personal bank statements. It determines your average monthly income.
This type of self-employed mortgage loan is advantageous for those with high expenses on tax returns, thereby reducing taxable income. It is also preferable for those who don’t have one to two years of returns verifying their income.
To qualify, a borrower requires:
- 620–680 credit score (minimum and vary by lender).
- One to two years of business or business bank statements.
- A debt-to-income ratio under 50%.
- 10–20% down payment.
Stated Income Loans
Stated income loans are best for those with a gross income but have lowered finances from expenses. They are unable to meet loan qualifications by larger institutions. To qualify for this mortgage, lenders add your gross income to net income (lines 150 and 236 on a tax return).
This figure provides an “Income Reasonability” figure, which assists you in qualifying for a loan. To apply for this self-employed mortgage loan:
- The purchase price must be under $999,000.
- Property must be owner-occupied and not rented.
- A five percent down payment must be funded by you and not gifted.
- The down payment must be a minimum of 10%.
- Individuals cannot own CRA money, and tax returns must be filed.
- The person cannot have late payments over the past year.
No-Doc or Low-Doc Loans
These loans don’t require much documentation or paperwork for approval. They don’t require borrowers to submit a credit check or have a traditional job. Instead, you must provide proof of income and government-issued identification.
Lenders may indicate they provide no-document loans, but what it means is they don’t require you to provide or fax documentation physically. They may ask to connect with your financial institution to see bank statements and incoming finances.
FHA Loans
The Federal Housing Administration (FHA) insures these self-employed home loans. They are dials for low-credit or first-time buyers, since their requirements are more lenient. To qualify, you must have:
- 3.5% down payment
- 580 credit score minimum
- Debt-to-income ratio under 50%
- Property must be a primary residence
- The loan must be within current FHA loan limitations
The FHA requires two years of business and personal tax returns to document your income. However, business tax returns are necessary if:
- Personal returns indicate your income increases over the previous two years
- Closing costs and down payment are not from a business account
- The loan isn’t a cash-out refinance
VA Loans
These loans, guaranteed by the Department of Veteran Affairs, are for service members, veterans, and surviving spouses. Interest rates are below-market, and there is no ongoing mortgage insurance.
Requirements for this loan are:
- Two years in current role/one self-employment year plus two-year related work history
- No down payment
- 580–620 credit score
- Eligible service history
Portfolio Loans
Portfolio loans are self-employed home loans where lenders originate and retain the loan rather than selling/offloading it on a secondary mortgage market. The loan remains in the lender’s portfolio for the entire term.
Lenders establish standards for this loan, such as the credit score that should be obtained before they approve it and the amount of financing offered to the borrower.
Hard Money Loans
Hard money loans (bridge loans) involve short-term loans. They are ideal for house flippers, investors, or developers renovating properties to sell. It can also provide a viable solution to foreclosure
This loan is funded by investor groups or private lenders instead of banks. They use real property or equity for collateral.
Types of Self-Employed Income Verification
Borrowers require three major verification types on declared income. These involve:
- Non-Traditional Income: Your business’s financial statements and bank verify income.
- Traditional Income: Traditional income is where self-employed mortgage lenders verify regular employment income from a two-year average on line 15000 on your Notice of Assessment or T4s. It may also include line 12000, which is Dividends from a Canadian Corporation.
- Stated Income: This no-income verification mortgage involves private and B lenders. The program is rigorous and limited to those with established businesses and exceptional credit histories.
How to Prepare Before Applying for a Self-Employed Mortgage in Ontario
There are several things to do before applying for your mortgage. These include:
1. Reviewing Credit History and Score. Ensure these are in excellent shape. You may consider pulling your credit report, correcting errors, and establishing a credit history. Also, limiting credit use looks favourable when applying.
2. Be Familiar with Your Debt-to-Income Ratio. If you think you should qualify but aren’t being approved for your required amount, lower your DTI. This tip will allow you to receive higher mortgage payments from your self-employed mortgage lender.
3. Save Money for Higher Down Payment. Larger down payments increase approval odds and lower monthly payments. It can also help secure lower interest rates.
4. Separate Personal and Business Assets. Some self-employed people have the two inter-mingled. If the down payment funds and settlement fees are isolated from business assets, it works best.
Getting a Mortgage From Canadalend.com
If you are an entrepreneur and have been refused mortgage approval by big banks, the independent, Canadalend’s licensed mortgage agent can help.
Since we are independent, we have access to hundreds of different self-employed mortgage brokers—many of whom specialize in lending to self-employed individuals who are single-income earners, have under two years of income track record, or don’t qualify under the bank’s stricter terms.
Yet, individuals can get self-employed no-income verification mortgages. However, it takes additional effort. At Canadalend.com, we help you determine which self-employed home loan best suits your lifestyle and financial goals.
If your income doesn’t meet the bank’s requirements, other self-employed mortgage brokers are available to step in and assist you in securing a no-income verification mortgage. This is where Canadalend.com comes in. Many lenders look for different ways to help self-employed people increase mortgage eligibility.
Why? Our self-employed mortgage lenders understand entrepreneurs look for ways to maximize taxable income. Some lenders don’t ask for traditional proof of income. Instead, they examine bank statements. Often, if your self-employment income fluctuates, lenders will track a certain amount of your reported income to increase your borrowing amount. This allows you to show your business dedications total more than that amount.
Since private lenders aren’t bound by the same rules as banks, they can extend your mortgage up to 95% of the purchase price to a self-employed individual—all without needing costly default insurance.
Your Trusted Partner for Self-Employed Mortgages in Ontario
Canada’s tighter lending rules only impact those who turn to Canada’s big banks. Non-traditional lenders that work with Canadalend.com, are not bound by the same mortgage rules as the big banks. That’s a fact that has becoming more evident to an increasingly larger percentage of the population.
A growing number of Canadians are turning to mortgage brokers like Canadalend.com who work with private mortgage lenders for their no-income verification mortgages in the Greater Toronto Area. Upwards of 10% of all mortgages originate with non-traditional lenders. That share of the market has grown significantly since the 2008–2009 recession.
Mortgage brokers who deal with private lenders instead of banks, like Canadalend.com, fill an important void left by the highly regulated banks. We give potential borrowers the chance to secure a self-employed mortgage or no-income verification mortgage.
We Offer a Range of Solutions for all Your Mortgage Needs
With our years of experience, we’ve seen it all, so we’re used to fine-tuning our services to unique financial needs. We understand that for most people, their home is the most valuable asset they will ever own, so it’s vitally important that they get the service they need.
At Canadalend.com we are dedicated to 5-star customer service. Get in touch with us and a lending specialist will help set up an appointment for a free personal consultation. We will help you review your mortgage options and find the solution that fits your needs!
To speak with a self-employed mortgage broker, contact us at 1-844-586-0713 or at info@canadalend.com. You can also visit our website here for further information.