Being self-employed comes with many benefits—flexibility, independence, and the ability to pursue your passions. However, when it comes to securing a mortgage in Ontario, being self-employed can present unique challenges. Traditional lenders often view self-employed individuals as higher-risk borrowers due to fluctuating income and less traditional documentation. But don’t worry! With the right preparation and approach, getting a mortgage as a self-employed individual is entirely possible.
Here are the key things you need to know to improve your chances of securing a mortgage in Ontario if you’re self-employed.
1. Gather Your Financial Documents
When you’re self-employed, your income verification process is different from that of a salaried employee. Lenders will want to see proof of your income over the past few years to assess your financial stability.
Documents to Prepare:
- Personal and business tax returns for the past 2-3 years
- Notices of Assessment (NOA) from the Canada Revenue Agency (CRA)
- Financial statements for your business
- Proof of business ownership (business license or incorporation documents)
Pro Tip: Lenders prefer to see stable or growing income over time. If your income varies significantly year over year, be prepared to explain the reasons behind the fluctuations.
2. Keep Your Credit Score in Good Shape
Your credit score plays a significant role in your mortgage approval process. Lenders will look at your credit history to determine how reliable you are when it comes to repaying debt.
Tips to Improve Your Credit Score:
- Pay your bills on time
- Reduce outstanding debt
- Avoid applying for new credit before your mortgage application
Red Flag: A low credit score can result in higher interest rates or even a declined mortgage application. Make sure your credit score is in good standing before applying.
3. Be Ready to Make a Larger Down Payment
Self-employed individuals may be required to make a larger down payment compared to traditional borrowers. This helps offset the perceived risk that lenders associate with self-employed income.
Typical Down Payment Requirements:
- For a standard mortgage: 5% to 20%
- For self-employed individuals: 10% to 35%, depending on your financial situation
Pro Tip: The larger your down payment, the better your chances of getting approved for a mortgage with favorable terms.
4. Consider Using a Stated Income Mortgage
A stated income mortgage is designed for self-employed borrowers who may have difficulty proving their income through traditional means. With a stated income mortgage, you declare your income, and the lender verifies it through other methods, such as reviewing your business activities and bank statements.
What to Know About Stated Income Mortgages:
- You may need a larger down payment
- Interest rates can be slightly higher
- Not all lenders offer this option
Red Flag: Stated income mortgages typically require you to have a good credit score and a strong financial profile.
5. Work with a Mortgage Broker
A mortgage broker can be a valuable ally when you’re self-employed. Brokers have access to multiple lenders, including those who specialize in self-employed mortgages.
Benefits of Using a Mortgage Broker:
- Access to a variety of lenders and mortgage products
- Guidance on preparing your application
- Help finding the best rates and terms
Pro Tip: Mortgage brokers can also help you navigate alternative lenders if traditional banks are hesitant to approve your application.
6. Be Prepared for a More In-Depth Review
As a self-employed borrower, expect lenders to take a closer look at your finances. They may ask for additional documentation to verify your income and the stability of your business.
Common Requests from Lenders:
- Bank statements for the past 6-12 months
- Proof of contracts or ongoing work
- Client references or invoices
Red Flag: If you have irregular income or a new business, be prepared to provide a detailed explanation of your business model and future earning potential.
7. Understand the Importance of Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is a key factor in your mortgage approval. This ratio compares your monthly debt payments to your monthly income.
What Lenders Look For:
- A lower DTI ratio indicates that you have more disposable income to cover mortgage payments.
- Most lenders prefer a DTI ratio of 40% or lower.
Pro Tip: Reducing your existing debt before applying for a mortgage can improve your DTI ratio and increase your chances of approval.
Final Thoughts
Getting a mortgage in Ontario when you’re self-employed may require extra steps, but it’s definitely achievable with the right preparation. By gathering the necessary documents, keeping your credit score in good shape, and working with a knowledgeable mortgage broker, you can secure the financing you need to buy your dream home.
Need help navigating the mortgage process? Contact us today to discuss your options and find a mortgage solution that works for your unique situation.
