Canada is the home of millions of self-employed individuals, and many of them invested in real estate properties. Since qualifying for mortgage loans is a complicated procedure, many self-employed persons believe they will not get any financial assistance required to finance a property.
The reality is quite different, and like investors in any other professions, a self-employed person can apply for mortgages to fulfil his/her financial goals. Several mortgage plans can be suitable for self-employed people, and one needs to follow some steps to get qualified for them.
In most cases, self-employed individuals prefer to go with the commonly held belief that it is almost impossible for a self-employed individual to obtain a mortgage, which is not valid. In this blog, we will explain some factors that can make a self-employed person eligible for the mortgages.
If you are planning to apply for a mortgage as a self-employed person, this blog can make your task easy.
Why Do Lenders Not See Self-Employed Applicants as Prime Borrowers?
Before approving loans or mortgages, lenders ensure whether the applicant meets the criterion or not. Property investors who come with steady and variable incomes and good credit score impress lenders more than self-employed people.
Since self-employed people do not meet the mortgage criterion set by the lenders, they do not consider such applicants as ideal borrowers. Hence, lenders have different guidelines for self-employed individuals, where a self-employed person can expect to get loans with higher interest rates than regular borrowers.
Lenders find those investors attractive who show steady and variable incomes. For lenders, self-employed people are less attractive, and they do not have to power to negotiate for lower interest rates. Hence, self-employed people often find it very tough to reach a lender ready to offer mortgages to them.
Another problem with the self-employed individuals is that they spend a lot to reduce taxable income, and this makes the situation worse for self-employed individuals. It forces lenders to speculate if the applicant makes enough money to repay the mortgaged amount. However, in some cases, self-employed borrowers get qualified with a larger down payment.
Employed Borrowers Vs Self-Employed Borrowers
To make the concept clearer, we have come with a comparison between employed and self-employed borrowers. One of the primary objectives for lenders like banks or mortgage brokers is to verify the ability of the applicants and ensure that each borrower can repay the borrowed sum within the assured period.
Likewise, a borrower should prove that he/she can repay the borrowed amount. For lenders, the financial ability to repay the borrowed amount varies from one to another borrower, and that is why they come with a different set of rules for self-employed individuals. If you are a self-employed individual and want to understand what differentiates these two groups of borrowers, follow the part.
Employed Borrowers
Employed individuals are bonded by contract with their employer and earn steadily. When required, an employed person can submit payslip to prove their claim. Such documents help lenders to qualify these individuals for loans or mortgages.
After receiving the payslip, lenders look at the numbers the applicant earns every month or year and evaluate if the person can repay the loan amount. For lenders, this is the simplest way to conclude if the applicant can afford to repay the borrowed amount.
Self-Employed Borrowers
The scenario can be different for a self-employed individual, as lenders come with a different set of terms and conditions for them. If you are a self-employed person, you may find managing your finance a little bit complicated.
With so many steps and a complicated procedure, self-employed people find it challenging to get qualified for mortgages. As a self-employed applicant for mortgages, you may have to collect invoices, bills, dividends and many other documents to prove your financial ability to repay the borrowed amount.
The worst part is that most of the self-employed individuals fail to submit such proofs and cannot go further in the process.
However, it is not that self-employed individuals cannot obtain mortgages, as some options are still there that can help them to meet financial goals.
Qualifying for a Mortgage as a Self-Employed Applicant
We have learnt what makes it difficult for self-employed people to get qualified for loans and why lenders consider employed individuals as primary borrowers. Like the employed people, self-employed individuals can also get loans provided they have met all the criteria set by the lenders.
What Do Lenders want?
Whether you are an employed or self-employed person, you have to impress your lender by meeting the entire criterion set for mortgages. As a self-employed person you have to show proofs for:
- Income stability
- Strength of your business
- The essence of your job
- If your business can generate enough money to repay the amount in the future
- Details of what types of client you serve or work with
- If you have a license for business
- If you are associated with any community or organization
- Proof of tax returns (income documentation)
- Details or profit and loss, etc
These are some proofs a lender can ask you to submit whenever you will apply for a mortgage to by a property. Now, let us talk about the ways to get prepared for mortgages as self-employed individuals.
Come with Good Credit Score
The higher credit score can make the way clear for you. Lenders prefer applicants who come with a good credit score. It can be a great way to become favourable for the mortgage application. Like the credit score, lenders can also verify your credit utilization to evaluate how much credit you use.
For example, if an applicant comes with a $10,000 credit limit with $5,000 in balance, the ratio of credit utilization will be 0.60 or 60%. Remember, lower credit utilization ensures a better credit score, which can make it easy for you to obtain private mortgages.
Debt-To-Income or DTI Ratio
DTI ratio is another crucial factor you need to take care of when applying for a loan or mortgage. The debt-to-income ratio defines the percentage of your monthly income that you use to pay your debts every month. Lenders like banks and mortgage brokers take the issue seriously because if the applicant comes with low DTI, he/she is less likely to turn a defaulter.
You can calculate your DTI easily by dividing your recurring debt by monthly income, excluding taxes. Your monthly expenses, such as utility bills, groceries and property taxes will not be considered as debts. As a self-employed person, if your DTI is 50% or more, try to reduce your debt before you apply for mortgages.
Find a Helping Hand
If you are applying for a mortgage as a self-employed person for the very first time, the procedure may look almost impossible to achieve for you. Seeking professional help in such a scenario can be the best decision you can make. Financial experts like mortgage brokers have the experience of many self-employed individuals, and they know how to help one such a person to qualify for mortgages.
If you live in Canada, finding a reputable mortgage broker will not be a tough job for you. One of the best benefits of working with such professionals is that they will present plenty of mortgage products suitable for self-employed individuals out of which you can choose the right mortgage plan for you.
Whether you are an employed or self-employed person, qualifying for mortgages is a complicated procedure. Both beginners and seasoned investors prefer to make the process simple by approaching a trusted mortgage broker. Thousands of self-employed individuals are obtaining mortgages in Canada every year. Like many self-employed individuals, you can fulfil your financial goals with the help of professional mortgage brokers. Hence, follow the tips mentioned above, contact the best broker in your area and get qualified for a mortgage loan.