Self-Employed? Here Are Some Tips for Obtaining a Mortgage
Self-employment is one of the biggest rising trends in today’s working world. Freelancers, entrepreneurs, independent contractors – these are the people who are driving much of the 21st century working world. However, while there are many advantages to being self-employed, there are a number of drawbacks as well. One of the difficulties that many self-employed people have is a mortgage application. How do you, as a self-employed person, ensure that you’re doing all you can to increase your chances of obtaining a mortgage?
The Difference With Being Self-employed
Even if a self-employed person works the same hours and makes the same salary as a regularly employed person, mortgage companies will still treat the self-employed person differently than other people. This is because most financial institutions want to avoid lending to individuals they see as “risky,” such as people without a regular source of income. You may be making a consistent income on a regular, monthly basis, but because of your designation of being self-employed, mortgage brokers will still classify you as a dangerous person to offer a mortgage to. That being said, there are several ways that you can convince financial institutions that you are the type of person they want to lend to.
What You’ll Need To Obtain a Mortgage
In order to increase your chances of obtaining a mortgage, you will need to keep excellent records of your income and business history. The first thing a mortgage broker will be looking for is proof of income. For some people, like contractors, this could mean keeping close track of your T4As. Others, however, will have to find some other way to prove their income. In order to obtain a mortgage, you will usually need to prove that you have had a steady source of income for at least the past two years in a row.
Another important factor in securing a mortgage is a solid credit rating. This is a good way to prove that, although you are self-employed, you have a history of making payments on time and avoiding debt. Other important documents to have on-hand are personal bank statements, business bank statements, and your business license, as well as any pertinent tax documents such as income tax returns and tax rebate forms.
Avoid the Tax Trap
One mistake that many self-employed people make is to claim a large number of business expenses on their annual income tax return. While this is totally legitimate, and can benefit you in the short-term through tax refunds, it can be a problem when you apply for a mortgage. This is because claiming a large number of business expenses can make it appear as though your annual income is smaller than it actually is. And, since income is the first thing that mortgage brokers take into consideration when evaluating your application, this could mean the difference between being approved for a mortgage and being rejected.
Life can sometimes be more complicated for self-employed people, especially when it comes to something like a mortgage application. However, as long as you can prove that you have a high enough annual income, you should be able to obtain a mortgage just like anyone else in the same income bracket. There is, however, one more thing to be aware of: be prepared for a higher down payment. Instead of the average 5 percent that is required of most people, self-employed people are usually expected to put down somewhere between 10 percent and 20 percent up front. This could mean that you have to save more, but once you’re approved, this will also mean that you’ll have a smaller balance to pay off.