For Canadian influencers, gig workers, and other self-employed individuals, qualifying for a mortgage can be a unique challenge. Without a traditional salary or employment history, proving income stability can be more complex. However, with the right preparation and understanding of lender requirements, getting approved for a mortgage is very achievable. This guide walks you through everything you need to know to qualify for a mortgage as a self-employed individual.
Why Is It Harder for Self-Employed Individuals to Get a Mortgage?
Self-employed people, including influencers and gig workers, often have variable or unpredictable income. Lenders view this as higher risk compared to traditional salaried employment, where income is regular and verifiable. Some common challenges self-employed mortgage applicants face include:
- Variable Income: Freelancers and influencers often see fluctuations in earnings from month to month, which can raise concerns about repayment reliability.
- Limited Financial Documentation: Without a pay stub or T4, proving income requires additional documents, which can be challenging for those without consistent record-keeping.
- Tax Deductions Impacting Reported Income: Self-employed individuals often use tax deductions to reduce taxable income. While great for taxes, a lower reported income can make it harder to meet lenders’ income requirements.
Understanding these challenges can help you prepare for the mortgage application process and gather the necessary documentation.
Steps to Qualify for a Mortgage as a Self-Employed Individual
Even if your income is non-traditional, you can still qualify for a mortgage. Here’s how to increase your chances:
1. Prepare Proof of Income and Financial Documentation
Lenders will want to see evidence of your income stability, so plan to provide comprehensive documentation, including:
- Two Years of Tax Returns: Most lenders require at least two years of tax filings to assess your income average and stability.
- Notice of Assessment (NOA): The CRA’s Notice of Assessment is crucial because it verifies your filed income and confirms that your taxes are in good standing.
- Bank Statements: Some lenders may ask for bank statements from the past six months to see a pattern in deposits, which helps verify consistent income.
- Business Financial Statements: If applicable, providing profit and loss statements or balance sheets for your business can help demonstrate income stability.
It’s helpful to organize these documents in advance, as lenders may ask for additional verification.
2. Minimize Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is an essential factor in qualifying for a mortgage. This ratio represents the percentage of your monthly income that goes toward paying off debt. A lower DTI ratio demonstrates financial responsibility and increases your approval chances.
Tips to Lower Your DTI:
- Pay down credit card balances and any outstanding loans before applying.
- Avoid taking on new debt in the months leading up to your mortgage application.
- Reduce unnecessary monthly expenses to maximize disposable income.
A DTI ratio of 35% or lower is generally favorable for mortgage lenders, although requirements vary.
3. Save for a Larger Down Payment
For self-employed applicants, a larger down payment can help offset the perceived risk of variable income. Generally, the more you put down, the less risky you appear to lenders, which can improve your approval odds and potentially qualify you for better interest rates.
Down Payment Requirements for Self-Employed Mortgages:
- Most lenders require at least 20% down for self-employed mortgages, though some may accept less if you can meet other qualifications.
- A down payment above 20% may give you access to more flexible mortgage options and lower interest rates.
Start saving as early as possible to ensure you can make a substantial down payment when you’re ready to apply.
4. Demonstrate Strong Credit History
A good credit score is essential, especially for self-employed borrowers. Since your income can vary, a solid credit history helps reassure lenders that you manage debt well and are likely to make on-time payments.
Credit Score Tips for Self-Employed Mortgage Applicants:
- Aim for a credit score of 650 or higher, though scores over 700 are more favorable for competitive interest rates.
- Pay bills on time, keep credit card balances low, and avoid opening new lines of credit before applying for a mortgage.
- Check your credit report regularly for errors and address any issues as early as possible.
Lenders view a high credit score as a sign of reliability, which can work in your favor when proving financial stability.
5. Consider Stated Income Mortgages
For self-employed individuals, a stated income mortgage can be an option. With stated income mortgages, borrowers don’t need to provide the same level of documentation, and lenders rely more on an applicant’s stated income (as well as assets, down payment, and credit score) for approval.
Eligibility for Stated Income Mortgages:
- Larger down payment requirements (often over 20%) to offset the higher risk.
- Higher interest rates compared to traditional mortgages.
While stated income mortgages may have stricter requirements, they offer flexibility for applicants with non-traditional income sources. Speak with your lender to see if a stated income mortgage might be an option for you.
Additional Tips for Self-Employed Mortgage Applicants
1. Work with a Mortgage Broker Specializing in Self-Employed Mortgages
A mortgage broker familiar with self-employed mortgages can guide you through the requirements, help you find competitive rates, and potentially connect you with lenders who offer products specifically for influencers, gig workers, and small business owners. They can simplify the process and present you with options tailored to your situation.
2. Maintain a Consistent Record of Income
Lenders prefer consistency, so if you’re new to self-employment, consider waiting until you have at least two years of steady income before applying. Consistent income across several months or years demonstrates stability and reliability, even if earnings fluctuate.
3. Pay Off Outstanding Taxes
If you owe back taxes, it’s best to settle these before applying. Unresolved taxes can be a red flag for lenders, as it suggests financial instability. Paying off taxes ahead of time can prevent any delays or issues in the approval process.
4. Reduce Business Expenses Leading Up to Application
Self-employed individuals often claim business expenses to lower taxable income, which can result in a lower income on tax returns. While this is beneficial for tax purposes, it may make it harder to qualify for a mortgage. If you’re planning to apply, consider reducing expenses temporarily to increase reported income on your tax returns.
Key Takeaways
While qualifying for a mortgage as a self-employed individual can be more complex, it’s certainly achievable with the right preparation. By maintaining accurate financial records, building strong credit, saving for a larger down payment, and working with an experienced mortgage broker, Canadian influencers and gig workers can improve their chances of mortgage approval. Start planning early and keep detailed records to make the application process as smooth as possible.
