There are essentially two types of self-employed or business-for-self (BFS) borrowers — those who can prove their income and those who cannot, and must instead use a stated-income mortgage product.
For those with the ability to prove their income, the mortgage process is really not that much different than someone with traditional employment. Income is proven through past notices of assessment (NOA), and the mortgage is qualified for based on this income. While the method of proving income might be slightly different for a non-self-employed borrower, the process is the same. The main difference is going to be in the documentation used to prove income. For someone who is salaried, income can be proven via a job letter and recent pay stub. As long as that person is not on probation, this income can be used to qualify for a mortgage.
So you can see that the main disadvantage to a self-employed borrower using proven income is that you require at least two years of history in that field to be able to provide this proof, where someone on salary can qualify for a mortgage with as little as one month on the job.
For those that can’t qualify based on their past income, they may qualify for a stated income product. Basically this means that you state a reasonable income for that profession, and the lender works from that figure. There are requirements that a business owner must meet to qualify for this program. It is imperative that the borrower have a clean credit rating with at least two years of history. The income that is stated has to be reasonable based on the profession and size of business. The borrower must also provide proof of self-employment, have at least five per cent of the down payment from their own resources, pay additional insurance premiums because of the higher risk of the loan, and the property must be owner occupied.
Getting pre-approved
While BFS mortgage financing is viewed on a case-by-case basis, if you work with a licensed mortgage professional to obtain a pre-approval, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property.
It’s important to note, however, that there is a significant difference between being pre-approved and pre-qualified. In order to obtain a pre-approval, the lender fully underwrites the deal, whereas, with a pre-qualification, only the most basic details are considered. Remember that many lenders will only issue a pre-qualification.
Alternative financing
If you do not qualify for traditional financing all is not lost, since you may be eligible for alternative — or private — funding.
Mortgage professionals often have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate — on average about 10 per cent — this route may enable you to acquire funds to purchase a home.
It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.
Another key point to consider is that private financing is equity based, meaning that the lender’s decision will be based on a specific piece of real estate. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.
As you can see, there are a number of different options available for self-employed borrowers. A mortgage professional will be able to guide you through the application process and discuss which options are best for you.
Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. He can be reached at 250 402-3903 or dean_bala@yahoo.com.
