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For the self-employed, a mortgage might be a huge goal. For others, it may be something they’ve never considered because they work for themselves and business is unpredictable. If you’ve been in the latter camp, it doesn’t have to be that way.
In 2014, approximately 2,752,300 Canadians were self-employed, according to figures from Statistics Canada. For many Canadians, self-employment means freedom from someone looking over their shoulders and freedom to make their own choices about projects they take on.
Sometimes it means income isn’t as steady, but that isn’t always problematic. Individuals who are self-employed are often seen as credit risks, because these individuals can have wildly variable income levels from month to month and year to year.
At CVE Mortgage Group, Inc., we believe that being self-employed shouldn’t mean that an individual will have trouble getting a mortgage. We work with numerous lenders with self-employed specific programs that help self-employed individuals achieve their mortgage goals. There are lenders out there who offer self-employed mortgages to others, and we work with many of them.
The Canada Home and Mortgage Corporation (CHMC) offers self-employed mortgage loan insurance options for self-employed residents who are looking for a mortgage to purchase, refinance or make improvements to a home. There is a common misconception that CMHC does not provide mortgage loan insurance to self employed individuals.
There are several different types of mortgages for individuals who are self-employed, including the following programs:
In the past, a self- employed individual had an opportunity to get a stated-income loan, based on their credit score and a statement regarding their income. Those days are long gone, and now, bankers go through far more paperwork for a self-employed mortgage.
Lenders look at several figures to determine whether a person is a good candidate for a mortgage. They take an individual’s monthly income, average annual income and their debt-to-income ratio as part of their calculations. They derive the monthly income figure by adding together the adjusted gross income figure from two years worth of tax returns and then divide that figure by 24.
Essentially, most lenders will take that two year history and take the average income over those years. For example, if an individual earned $50,000 in 2013 and $60,000 in 2014, lenders would typically use $55,000 in income for calculating the affordability of a given mortgage for that client.
Lenders want to know that borrowers can afford their mortgage and their other financial responsibilities. They look at the debt-to-income ratio to determine how that plays out. Forbesmagazine reports that lenders look for two numbers: the housing-related debt payments, or front-end payments and the recurring debt payments, or back-end payments. Housing-related payments shouldn’t be more than 39 percent of income (for excellent credit, score of 680 or higher for CMHC insured mortgages), while recurring debt payments shouldn’t be more than 44 percent for the same credit worthy client. These numbers drop to 35% and 42% respectively for clients with credit scores from 600 to 679. Below 600 credit scores are only approved for CMHC insured loans on an exception basis.
Alt-A mortgages are typically more lenient on these numbers, some even going as high as 60%/60% for the respective ratios.
There are several things you can do to make qualifying easier if you are a self-employed individual and you’re seeking a mortgage to purchase a home.
Refinancing for Self Employed Individuals
A mortgage refinance for a self- employed individual shares many of the characteristics of that of a self employed purchase.