Working For You, NOT The Banks!
Self Employed Mortgages Explained
May 19, 2020 | Posted by: Jeffrey Kioussis
Self-Employed Mortgages Explained
Whether you run a brick and mortar shop or you work from home…you’re the go to person at work, you own your business and are self-employed, you make all the major decisions, control your work schedule, manage all expenses as well as clients and take care of everything that needs attention. This is you and your role, maybe it’s a new change or maybe it’s something that has been as such your entire working career. With that in mind, you may or may not already know how intertwined your work life and your personal life really are. You also may or may not know how different a mortgage becomes when you are self-employed or a when applying for a Business for Self-Mortgage (BFS).
So why is so difficult now to get a regular mortgage and what is the difference? With nearly 20% of Canadians being self-employed a need to cater to this market has become more efficient and specialized. Each and every mortgage will be different as each and every business is different. It is always important to speak with a mortgage professional to help navigate you through the application process as a self-employed person.
What is the difference between a regular mortgage and your mortgage? Well, the main difference is validating income and employment. This article will help you better understand the differences and how to better prepare you for the process.
Now, let’s consider that you have a regular, salaried job from a reputable employer. You will receive your annual T4 and file your taxes. For the most part, there is no need to be creative with your taxes and your financial position is very easy to understand. You can produce paystubs from a third party to validate your income and there is someone other than you, responsible to answer questions regarding your employment position. What you see is what you get and that’s very easy, in the mortgage world, to work with.
Considering that your credit, property and finances meet standard lender requirements. A BFS mortgage pose different challenges than a conventional, standard mortgage. Why is that? Why is getting a mortgage when I am self-employed so challenging? Understanding the mortgage process is an important part of understanding the challenges faced by applying for a BFS mortgage.
Well the answers are pretty simple but involve a few things.
Let us begin by saying, as a business owner, you have probably noticed your taxes are done differently than most others. You will be working with T1, T2 or something other than a standard T4…you also have and utilize the ability to write off expenses to lower your income bracket as well as having other items & tricks that help lower your taxable income. Let us not even begin the discussion of what you do if and when you are paid in cash. Well the good thing is you will pay little to nothing back in income tax…you might event get a refund. Down side is that affects your income level on you Notice of Assessment (NOA).
What does that mean?
Your NOA explains how much income you made in that year and how your income was calculated by Canada Revenue Agency CRA. This will be a main focus that a lender will look at to determine your ability to repay the loan. Its handy for lots of reasons and will help explain anyone seeing it your income and your expenses. It will also allow documentation of amounts owing or refunded.
More than anything though, in regards to your mortgage, it shows your documented, legal income that will be used in a formula and averaged to document your declared income over a span of 2-3 year.
It is important to note that a mortgage professional can help explain and show you how to use expenses to “gross up” your income or validate income by ways that are acceptable by lenders. Also, important to note that some lenders will use Self-Declared Income forms to help find entrepreneurs, such as yourself, suitable mortgages. This is a very important part of your process and a very valuable tool needed by self-employed persons.
Next part a lender will look at will be your business because remember, the lines between work you and personal you cross over quite a bit so it is very important to explain how that works with your business.
Things such as ownership of the business, stability of the business and understanding your cash flow will all become very important to a lender. Now of course, nobody understands your business more than you and there are nuances that paper can never explain. A mortgage professional will need to paint a portrait of you and business to your lender. Things like peak seasons and lulls will need to be explained as well as how your business operates and of course expenses associated with your business. Bank statements, articles of incorporation or master business licence, business financial statements are all important to have on hand. For a full list of documents to have ready on hand when applying for financing as a self-employed person speak with your mortgage professional. The documents requested will all provide a legal documentation that your lenders will require for the process and help everyone understand what you are really trying to say about your income.
So now that we have a better understanding of the work involved in your process and why seeking a mortgage as a self-employed applicant is different than a conventional mortgage what comes next? Your mortgage will be as unique as you and your business so that’s hard to predict but why not read further into Getting Started and What To Expect for further knowledge. If you wanted to get a jump start on the understanding and what’s available for you, why not reach out to one of our mortgage professional for a consultation. You can get real time information and options that are suited for you.