Can you get a mortgage if you're self-employed?

There’s an inordinate amount of paperwork produced in the mortgage application process.  Banks and lenders have to cover their bases.  They even have steps to prevent potential borrowers from laundering money through the home-buying process.  It’s not that they want to make it difficult for you – they must need to be careful in this age of scams and con-artists. 

If you’re one of the many Edmontonians that are self-employed or maybe working in an underground economy with non-reported income (although you might want to reconsider that), you may not fit into the conventional application process at many institutions because you don’t fit the criteria.  But you will be subject to some pretty close scrutiny unfortunately, especially now after the 2008 collapse of credit and the high debt to equity ratio in the sub-prime mortgage fiasco in the U.S.

What paperwork you’ll need

It’s a generally accepted piece of paper – the T-4, proof that you earned income through employment.  And a letter from an employer. But if you’re self-employed you don’t have one.  When going through the pre-approval process when home shopping, you want sellers to know you’re serious and you want your agent to know that you’re a serious contender.  Bank statements and CRA Assessments are critical pieces of paper that you will require.   By the way, getting pre-approved for a mortgage doesn’t cost anything, and you don’t have to use the bank or lender that pre-approved you.  There’s no obligation.  You may want to talk to two or more when you’re finding out about lending options for self-employed people.

When it comes to the serious stuff, you’ll need at least two year’s worth of accounts.  Two years of assessments, two years of bank statements showing money in and money out.  Maybe even contracts for future work.  You’ll have more credibility with you lender if your paperwork has been organized for you by an accountant.

Lending programs just for the self-employed

Every major player in the mortgage lending field have worked hard to meet the needs of the self-employed entrepreneur.  One of the most frequent requests that you should anticipate is a higher-than normal down payment.  Most lenders would like to ensure that there is a 35/65 split between equity and debt with self-employed people.  Depending on your income, you may still quality to put down a more reasonable 10% down payment, 5% of which you might have come up with yourself and 5% which can be gifted to you but only from a close family member.  They may take your average income over the past two year period and use that average to determine how much to lend you. Your personal credit, not your business credit, has to be in good standing and very high.  Like, squeaky clean.  They would also like to see that you have been self-employed for a minimum of two years.

If your credit’s not that great

The better your credit, the more you can borrow. If your credit is damaged in some way, consult with a mortgage broker rather than a bank.   They can help you sift through a variety of options and mortgage policies, such as what sort of prepayment privileges there are, penalties and refinancing options.