There are two different types of mortgages for self-employed borrowers. One is based on qualifier income (proof of income on paper) and the other is non-qualifier income (no proof of income on paper). There are big differences in lender policy based on each type of borrowers.
Borrowers who qualify based on provable income:
Once you are self-employed the mortgage broker or lender will ask to see your last two years Notice of Assessment Income Tax Return. The income on these documents is averaged out over a two year span. This income is then used to qualify for your mortgage. If the income is enough to support the mortgage you need, then you as a borrower, can put down as little as 5% for a purchase, refinance up to 80% of your property value, purchase rental properties, and even access secured lines of credit. You are treated just like a borrower on salary or hourly income. Documents required are:
- Proof of self-employment for at least two years such as business license, Articles of Incorporation.
- 2 years tax returns to confirm income and no taxes owning. If taxes are owing, they need to be paid before the mortgage closes.
Borrower who qualify based on no income support:
One challenge that can pop up with self-employed borrowers is their Notice of Assessment Tax Return Income not being enough to carry the cost of their mortgage. Self Employed borrowers get to write off their expenses against income however, as a result, their net income is reduced below the actual real income/gross income. These borrowers can fit into what we call, the Self Employed Stated Income Program. A borrower can state their income rather than have to prove it on paper. The Income stated has to be reasonable based on the type of employment. Usually 90K is the cut off therefore, borrowers needing to state more will need to show financial statements or borrow from a more high risk lender.
If the income is reasonable and the lender accepts the income, other documents required would be:
- Proof of self-employment as per above and last year Notice of Assessment to show no taxes owning. If taxes are owning they need to be paid.
- Minimum of 10% down to purchase a property
- Can refinance up to 80% as well but mortgage needs to insured. To avoid insurance, the loan to value has to be 65% or less.
- It is rather difficult to purchase a non-owner occupied investment property under the Stated Income Program. The borrower would need to borrow through a higher risk lender. Secured lines of credit are not available unless through a higher risk lender.