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How to qualify for a mortgage if you are self-employed

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

September 27, 2018 - Karl Yeh

Are you self-employed and wondering about getting a mortgage? What are key differences to someone working for another organization? In this episode, we discuss qualifying for a mortgage if you are self-employed and financial requirements for qualification. We also explore if there are any impacts of being a sole proprietor or being incorporated. Finally, we talk about getting a mortgage while doing hourly work and impact of low income and/or bad credit. 

 

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Transcription:

Karl Yeh:

Hi, everyone. Welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics and tips from home buying experts. And remember, if this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button below, hit the little notification bell, so [00:00:30] you don't miss anything.

Today I'm joined by Mujtaba Syed, Manager Mobile Mortgage Specialist with TD Canada Trust, and the question we're going to answer today is,

How do you qualify for a mortgage if you're self-employed?

Mujtaba Syed:             

Yeah, that's a great question.

Most lenders are very similar when it comes to self-employed income or if you're self-employed, they want to see that you've been self-employed in the same industry for at least three years.

What they want to do is they want to see somewhat of a consistency, right, so they're most likely going to use a two-year average of [00:01:00] the income that you have reported from being self-employed.

Then there are some lenders that have ways where they could maybe gross up that income, understanding you're self-employed, you have certain expenses, and then kind of see from there.

But there are other things, as well, that we can do with self-employed. We can look at your financials. We can take a look at your taxes to see what you have shown, so you have to pay a little bit less, because self-employed, there is that benefit of being self-employed where you can control how much taxes you [00:01:30] end up paying.

But you definitely want to see what's available.

Now, the insured, there's an easier way to get approved to the insured self-employed, where we have something called the stated income program through Genworth, where you can see if it's a little bit easier, try it that way.

Once again, it's a discussion to have with your lender and your specialist, and definitely interview your lender and your specialist to see if they're very familiar when it comes onto self-employed policies, because they differ quite a bit, and if [00:02:00] someone who's not very proficient in dealing with self-employed people, or self-employed borrowers, they might not know which policy to apply.

So once again, ask them, "Have you dealt with a lot of self-employed? How do you feel? Have you gotten a lot of approvals for self-employed income?" and then go from there.

But self-employed, definitely,

Just because you're self-employed does not mean that the bank will not lend to you. They might ask you for a little bit of extra documentation to see where your income is coming [00:02:30] from, but at the end of the day, if your lender is very proficient with their policies with self-employed, he should be able to help you.

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Karl Yeh:                      

Well, I know you touched on financial requirements, so maybe it isn't just for self-employed but

What are some of the financial requirements that need to be met to qualify for a mortgage?

Mujtaba Syed:             

Great question, Karl.

The financial requirements that are needed by the lender is to see repay-ability, right. When a lender wants to lend you a mortgage, they want to see that you can definitely afford to pay  that back.

[00:03:00] Banks are not in the business of lending money and trying to recoup their assets or their homes. They want to make sure that you can pay back what you've borrowed, and that's where the financial requirements come in.

For self-employed, they want to see, well, on paper, how much are you showing on paper? And on paper, if you're not showing a significant amount, maybe you can try to find other ways to prove your repay-ability.

For someone who's not self-employed, it's technically a lot easier because it's very cut and dry to take a look at your income. [00:03:30] If it's a salary base, they'll see how much salary you're getting.

They might take into account if you make any bonuses, or if you're getting some kind of share structure ownership or anything like that, they might want to take all those into account.

Hourly work

And if you're not on salary and you're working on an hourly basis, they might even want to see:

  • if you're getting something like overtime.
  • If you're working lots of overtime,
  • if you have consistency over the overtime, they can take a look into that.
  • If you work different shifts and you get shift differentials at a higher rate of pay, they might want to take a look at that, [00:04:00]

But for most banks, what they'd really like to do, like to see consistency.

They want to see something over a two-year period, to see, does this make sense? Is this consistent with what we think?

And your bank is always trying to help you, definitely, to get or qualify for a mortgage, so they'll try to look at a lot of different options to see if you can qualify or not, for sure.

So definitely have a conversation with your lender when you're sitting down with them, and explain to them all the avenues that you think that you can make income.

Like, if you're working overtime, bring that up. If you have shift differential, definitely [00:04:30] bring that up.

If you're getting some kind of allowance at work, like a car allowance, or a phone allowance, or a moving allowance, or et cetera, whatever it is, definitely bring that up so they can actually see if they can actually add that to your income, to help you qualify for your mortgage.

Karl Yeh:                      

I didn't know that, that you could actually use your overtime and your bonuses to actually help you qualify. I thought it was just your set salary or your hourly wage.

Mujtaba Syed:             

No, that's a great question. A lot of people unfortunately maybe don't realize that, right.

They do want to take a look at overtime, but they want to take a look [00:05:00] at it over the two years, like I said.

They want to look at consistency, so if you're consistently working overtime over a two-year time period, they will take an average of the two years to see, does this make sense?

Same with bonuses. If you're consistently getting bonus over a two-year time period, they want to take a look into that because [inaudible 00:05:16] it's an added benefit to you, like you've worked hard for your overtime, or you've worked hard to get a bonus.

Banks will definitely take a look at that and actually use that towards your income qualifying capabilities.

Karl Yeh:                      

And if you want to know more [00:05:30] about how much you can get qualified  for a mortgage, check out our video above.

I guess the last question I have is, does, either for self-employed or a salaried worker is,

How about low income or bad credit? How does that impact the ability to qualify?

Low income

Mujtaba Syed:             

Yeah, another great question, Karl.

Low income, unfortunately, you're going to have a harder time with the repayability portion of what you're looking at borrowing.

So when it comes down to having lower income, there's just no other way around it, right. Unfortunately, [00:06:00] you might want to look at maybe reducing your budget, maybe find something that fits more into what you can qualify for, so you can actually have a comfortable payment.

You can always look at getting a co-signer. You can look at doing these things, but I always like to tell people is that getting a co-signer might help you qualify for a higher mortgage, but keep in mind, it's you at the end of the day that has to make that payment, right.

If you're not comfortable making that payment, and you feel like that budget is just too much for you, then maybe just reduce it.

And then [00:06:30] see in a couple of years where you could move into something a little bit, let's say, smaller or a little bit cheaper, and then you can actually build up your savings and maybe you get a higher income in the future.

You can always upgrade later on, right, so don't ever, what we call, just money pinch to get into a home, or become mortgage-poor, is another term that we like to talk about, where most of your budgeting is going towards your housing cost.

Bad credit

Another thing that you brought up was poor credit. [00:07:00]

Poor credit definitely impacts, right. When it comes on to credit, we kind of, at the banks, look at that as character.

We will look at it to see if you have made a promise to pay, right. Having a credit card is a promise to pay. Having a loan or a line of credit is a promise to pay.

Same with as a cell phone. And if you're late on your payments or you haven't made your payments, you haven't really lived up to your obligations or your promise.

So when banks are looking at lending, they are going to look at your credit to see, do you keep your word? Are you on top of your repayments? Because  that could really impact if they want to lend to you. Maybe you won't stay on top of your repayments.

[00:07:30] So a lot of great things, but it doesn't mean that if you made a mistake in the past, that it's over. Banks will actually look into that if there is a certain scenario that kind of makes sense and you explain to them, it could be an odd one-off situation, they will 100% consider that as well.

Or also, if you have made some mistakes in the past, now you've worked hard and bettered your credit, or are working to better your credit, banks will also take a look at that, and they will also give  you a second chance or a second ... a review, once your credit gets better.

[00:08:00] It's not the end of the day if you have some mistakes in the past. It's always trying to show the bank, or the lender, or the specialist that you're working hard and making that right.

Does being a sole proprietor or being incorporate impact getting approved for a mortgage?

Karl Yeh:                      

The last question, in terms of self-employment though, does it matter if you've set up a corporation or you've set it up as your own business?

Mujtaba Syed:             

Yeah, great question. There are definitely benefits of both, right, to see, but we would.

We would definitely [00:08:30] take a look, if you're self-employed, a sole proprietor, as we call it, or being incorporated, as what Karl had mentioned, and they have different requirements.

It's very lengthy and detailed to go into it right now, but definitely, if you're one of those two scenarios, definitely speak to your lender and they can advise you which policy is best, based on that, for you, which self-employed policy is going to help you get qualified.

And definitely, talk to them about something that we call add-backs or business financials and stuff.

Have that conversation with them and they can advise you [00:09:00] exactly which route to take for the most easiest approval.

Karl Yeh:                      

Perfect. The question I have for you is:

Are you self-employed? And if you are, did you run into any issues regarding getting approved for a mortgage?

Let us know in the comments section below.

And remember, if you want to watch any more of our mortgage or mortgage rate videos, check it out in the description below.

Thank you very much for joining us and we'll catch you next time.

 

Your turn:

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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