There are essentially two types of self-employed or business-for-self (BFS) borrowers – those who can prove their income and those who cannot, and must instead use a stated-income mortgage product.
By providing the required documentation, you’re much more likely to be approved for a mortgage if you qualify based on your income. The trouble is that if you cannot prove your income, you pose a higher risk in the eyes of lenders. In mortgages, as in most other things, pricing is based on risk – the riskier the lender perceives you as a borrower, the higher the interest rate you will be required to pay on your mortgage.
Canada Mortgage and Housing Corporation (CMHC) offers default mortgage insurance for BFS clients through a stated-income mortgage product up to 95% loan to value (LTV) – meaning the down payment can be as low as 5% of the purchase price – but the income has to make sense based on your occupation. This is important, because the chances of finding lenders to fund this type of deal are significantly boosted if the mortgage is insured.
Lenders and insurers are well aware of the tax write-offs that BFS borrowers can leverage, but these deals are accepted or declined based on average incomes for specific fields, as well as your credit rating. It pretty much goes without saying that those with credit blemishes will have a tough time obtaining traditional mortgage financing if they’re self-employed.
Getting pre-approved
While BFS mortgage financing is viewed on a case-by-case basis, if you work with me to obtain a pre-approval, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property.
It’s important to note, however, that there is a significant difference between being pre-approved and pre-qualified. In order to obtain a pre-approval, the lender fully underwrites the deal, whereas with a pre-qualification only the most basic details are considered.
Should a pre-approval and/or mortgage default insurance be unobtainable, the maximum mortgage amount you are likely to qualify for is between 50% and 75% – meaning you will need a much larger down payment.
Alternative financing
If you do not qualify for traditional financing all is not lost, since you may be eligible for alternative – or private – funding.
As a mortgage professional, I also have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate, this route may enable you to acquire funds to purchase a home.
Private financing is equity based, meaning that the lender’s decision will be based on a specific piece of real estate as opposed to just focusing on your credit score. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.
When you get into the private-lending realm, not only are the rates higher, but the mortgage terms are also shorter – typically for 12 months at a time. If you do end up in a private mortgage, your goal should be to build up your credit so you can head back to a traditional lender within 12 months – where you will receive better interest rates and, overall, more mortgage options.
I can build a step-by-step plan and guide you through the process of building your credit to get back into traditional financing as soon as possible.
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