How to Get a Mortgage When you’re Self-Employed
There’s a misconceptions out there that getting a mortgage when you’re self-employed is a lot more challenging than when you’re an employee. That’s simply not true. In this article we’ll look at getting a mortgage when you run your own business.
The Mortgage Process When You’re Self-Employed
Pretty much anyone can start a business these days with the prevalence of the World Wide Web. A mortgage represents a significant financial commitment. Before a lender approves a mortgage for you, the lender will want to make sure your business is stable. One of the ways that the lender does this is based on tenure.
To qualify for a mortgage with a Prime lender at the most competitive rate, the lender will want to see that your business has been operating for at least two years and you have income filed on your tax return from the company on the last two tax returns. If that’s the case, it makes it a lot easier to qualify for a mortgage.
If you’re incorporated, it’s the personal income you take out of the business used for mortgage qualification purposes. Usually, that’s in the form of salary or dividends. Whatever your salary or dividends is on your tax return, the lender takes a two-year average, and that’s used as your income for mortgage qualification purposes.
If you’re not incorporated – sole proprietorship or partnership – the lender uses your net, not gross income, on your tax return. This is very important and is worth repeating. The lender uses the income you pay yourself from the business after the company’s expenses.
Many small business owners may have a successful business, but if you choose to pay yourself a minimal salary to save on taxes, it will make it more challenging to qualify for a mortgage, as you can’t use the gross amount you earn from your business, you have to use the net amount.
For example, if you have a gross professional income of $200k, but due to many write-offs and a good accountant, you only have a net professional income of $30k, the $30k is all you can use for mortgage purposes.
What Else Do Lenders Care About?
The lender also cares about how stable your business is. For example, suppose your run a brick-and-mortar business, such as a gym or restaurant, that has been shut down several times due to the pandemic. In that case, a lender will be more hesitant to approve your mortgage than a business that hasn’t been affected by the pandemic.
In terms of documents, the lender will want to review your complete tax return from the last two years, notices of assessment from the last two years, business licenses (if applicable) and articles of incorporation (if applicable).
The Bottom Line
Are you someone who’s self-employed and you’re looking for a mortgage? Speak to one of our mortgage experts today. We can help ensure your application is as strong as possible when it’s presented to the lender.