realtylinkonline

April 6, 2001
How to qualify for a mortgage when you're self-employed

If you're self-employed, you're part of an increasing trend in the workplace. Ten years ago, only one in six Vancouver area workers was self-employed. The ratio is now one in five workers and is expected to grow to one in four by 2005. 

If your business is succeeding, you could be thinking of buying a home or trading up your current home. That means you will likely be shopping for a mortgage soon. You will increase your chances of qualifying if you're familiar with what lenders require and the types of questions they are inclined to ask.

Mortgage lenders at banks and credit unions consider you to be self-employed if you:

• run a business alone as a sole proprietor, with a partner, or as a corporation;
• receive 25 per cent or more of your income from the business;
• work on short contracts for different employers; or
• are paid solely on a commission basis.
  

You are not self-employed if you receive a regular paycheque from an employer, even if it is part-time work performed for more than one employer. Under these circumstances you are considered a salaried employee.

Lenders evaluate salaried and self-employed borrowers the same way: on the size of their down payment and on their ability to repay the mortgage. But there is a difference. Salaried borrowers must verify gross income through paycheques or a letter from an employer.  Self-employed borrowers must verify net income, or what is left after business deductions are subtracted from gross earnings.

For example, as a self-employed person, if you make $100,000 annually in gross earnings but write off $80,000 for business expenses, you have net earnings of $20,000. Unless you have documentation to convince lenders your net income is higher, you will be treated the same way as a salaried employee making $20,000 annually.

As proof that you have a viable business, a good credit rating and make timely payments on loans and monthly bills, you'll need to provide the last two years of the following documents: (a) monthly bank statements, (b) corporate tax returns, (c) business balance sheets, (d) profit-and-loss statements, (e) business credit card statements, and (f) credit references or letters from financial institutions. Some lenders may also ask for proof that your industry is growing and has prospects for future growth.

Lenders will average your earnings over a minimum of two years to get a big picture of your finances. If your net income in 1998 was $30,000, followed by a net income of $100,000 in 1999, you may qualify for a loan based on an average income of $65,000.

Other useful documents include a letter from your accountant, proof that you pay your rent on time, and a personal balance sheet showing assets such as stocks, and debts such as credit cards or car loans.

Photocopy sets of all your documents and neatly prepare them as a package. Since you will likely shop for a mortgage at different financial institutions, you'll want to present yourself as an organized and responsible borrower. Compare lenders to get the best loan package to meet your needs, combined with the best rate. Remember to negotiate. Even one quarter of one per cent can save or cost you a lot of money. As a self-employed business owner, getting a mortgage with a good interest rate depends on your ability to maintain payments and your preparation.