Self Employed

Business Owners Seeking a Mortgage

As a business owner, securing a mortgage in Ontario requires careful planning and understanding of the options available. Whether you're looking to buy your first home, refinance an existing property, or invest in real estate, Wilson Mortgage, led by Cameron Wilson, is here to guide you through the process. We understand the unique challenges faced by business owners, and our tailored mortgage solutions are designed to help you achieve your financial goals while complying with Ontario's strict mortgage regulations.

Differences Between Self-Employed and Employed Individuals

The process of obtaining a mortgage differs significantly between self-employed and employed individuals. Employed individuals typically have a straightforward process, as they can provide proof of consistent income through pay stubs, T4 slips, and employment letters. This regular and predictable income stream makes it easier for lenders to assess their mortgage eligibility.

Self-employed individuals, on the other hand, face more complexity. Without a steady paycheck, proving income can be more challenging. Lenders often require additional documentation, such as business financial statements, Notice of Assessments from the CRA, and personal tax returns. This can make the mortgage approval process longer and more involved.

Mortgage Options for Self-Employed Individuals

Self-employed individuals have several mortgage options available, each with its own set of advantages and disadvantages:

1. Stated Income Mortgages

• Pros: These mortgages allow you to qualify based on your stated income rather than documented income. This can be beneficial if your reported income is lower due to tax deductions.
• Cons: Interest rates may be higher due to the perceived risk by lenders, and not all lenders offer this option.

2. Stated Income Mortgages

• Pros: These mortgages allow you to qualify based on your stated income rather than documented income. This can be beneficial if your reported income is lower due to tax deductions.
• Cons: Interest rates may be higher due to the perceived risk by lenders, and not all lenders offer this option.

3. Stated Income Mortgages

• Pros: These mortgages allow you to qualify based on your stated income rather than documented income. This can be beneficial if your reported income is lower due to tax deductions.
• Cons: Interest rates may be higher due to the perceived risk by lenders, and not all lenders offer this option.

4. Business For Self (BFS) Mortgages

• Pros: Specifically designed for self-employed individuals, BFS mortgages consider your business's financial health. You may be able to use business income to qualify.
• Cons: Requires extensive documentation, including business financial statements and proof of income stability. Interest rates may also be higher than traditional mortgages.

5. Alternative Lenders

• Pros: These lenders are more flexible with income verification and may consider your entire financial picture, including assets and equity.
• Cons: Interest rates can be significantly higher, and the terms may be less favorable compared to traditional lenders.

6. Secured Line of Credit

• Pros: Offers flexibility in borrowing and repayment. You can access funds as needed, which is useful for fluctuating income.
• Cons: If not managed carefully, it can lead to higher debt levels. Interest rates may also be variable, leading to potential cost increases.

Pros and Cons of These Choices

• Stated Income Mortgages
  • Pros: Easier qualification, especially for those with lower reported income due to tax deductions.
  • Cons: Higher interest rates and fewer lenders offering this option.
• Business For Self (BFS) Mortgages
  • Pros: Tailored for self-employed, considers business income.
  • Cons: Requires extensive documentation and potentially higher interest rates.
• Alternative Lenders
  • Pros: Flexible income verification, may consider the broader financial picture.
  • Cons: Higher interest rates, less favorable terms.
• Secured Line of Credit
  • Pros: Flexible borrowing and repayment, useful for managing cash flow.
  • Cons: Risk of higher debt, variable interest rates

Frequently Asked Questions for Self-Employed Individuals Seeking a Mortgage in Ontario

1. What documentation do I need to provide as a self-employed individual?

As a self-employed individual, you’ll need to provide more extensive documentation compared to an employed borrower. This typically includes your last two to three years of personal income tax returns, Notice of Assessments from the CRA, and business financial statements. Lenders may also request additional documents such as your business license, articles of incorporation, and a year-to-date profit and loss statement. This helps them verify the stability and consistency of your income.

2. How many years of income history are required?

Most lenders require at least two years of income history to assess your ability to repay the mortgage. This means you’ll need to provide tax returns and financial statements for the past two years. However, some lenders may be willing to consider one year of income history if you have strong credit and a substantial down payment. The more consistent your income, the better your chances of approval.

3. Can I qualify for a mortgage if I have fluctuating income?

Yes, you can qualify for a mortgage even with fluctuating income, though it may be more challenging. Lenders often take an average of your income over the past two to three years to account for any fluctuations. If your income varies significantly, be prepared to explain the reasons behind the fluctuations and how your business is performing overall. Providing additional documentation that demonstrates the health and growth potential of your business can also be beneficial.

4. What credit score do I need to qualify for a mortgage?

A good credit score is crucial for mortgage approval. While the minimum credit score varies by lender, a score of 680 or higher is generally preferred by most traditional lenders. A higher credit score can lead to better mortgage rates and terms. If your credit score is lower, you may still qualify, but you might need to work with alternative lenders who specialize in offering mortgages to those with less-than-perfect credit, though at higher interest rates.

5. Are there specific mortgage products for self-employed individuals?

Yes, there are specific mortgage products designed for self-employed individuals, such as Stated Income Mortgages and Business For Self (BFS) Mortgages. These products are tailored to accommodate the unique financial situations of self-employed borrowers. For instance, Stated Income Mortgages allow you to qualify based on your stated income rather than documented income, which can be advantageous if your reported income is low due to tax deductions. BFS Mortgages, on the other hand, consider your business’s financial health as part of the qualification process.

6. Can I use my business income to qualify for a mortgage?

Yes, you can use your business income to qualify for a mortgage. Lenders will consider your business income, but they’ll want to see consistent profitability and stability over several years. You’ll need to provide detailed business financial statements and personal tax returns to verify your income. Some lenders may also take into account any retained earnings or salary draws from your business, which can help strengthen your application.

7. What are the interest rates for self-employed individuals compared to employed individuals?

Interest rates for self-employed individuals can be slightly higher than those for employed individuals, particularly if you’re opting for a Stated Income Mortgage or working with alternative lenders. This is because lenders perceive self-employed borrowers as higher risk due to the variability in income. However, if you have a strong credit score, a substantial down payment, and stable income history, you may still qualify for competitive interest rates comparable to those offered to traditionally employed borrowers.

8. How can I improve my chances of getting approved for a mortgage?

To improve your chances of mortgage approval as a self-employed individual, focus on maintaining a strong credit score, reducing your debt, and saving for a larger down payment. Ensure that your business financial statements are accurate and up to date, and be prepared to provide detailed documentation to verify your income. Consider working with a mortgage broker who specializes in self-employed borrowers, as they can help you navigate the complexities of the application process and find lenders who are more flexible with income verification.

9. What are the common challenges self-employed individuals face when applying for a mortgage?

Common challenges include proving consistent income, meeting the documentation requirements, and potentially facing higher interest rates. Lenders may scrutinize your income more closely due to its variability, and they might require additional documentation compared to employed borrowers. Additionally, you might have to deal with stricter debt-to-income ratio requirements, making it harder to qualify for the desired loan amount. Preparing thoroughly and working with a knowledgeable mortgage professional can help mitigate these challenges.

10. How does my debt-to-income ratio impact my mortgage approval?

Your debt-to-income (DTI) ratio is a critical factor in mortgage approval. It’s calculated by dividing your total monthly debt payments by your gross monthly income. Lenders prefer a DTI ratio of 43% or lower, although some may accept higher ratios depending on your overall financial situation. A lower DTI ratio indicates that you have sufficient income to manage your debts, including the mortgage, which makes you a more attractive borrower. To improve your DTI ratio, consider paying down existing debts before applying for a mortgage.