Securing a mortgage is a significant milestone in the journey towards homeownership. However, for self-employed individuals, the process can be more complex than for those with traditional employment. Self-employed individuals often face unique challenges when it comes to proving their income and financial stability to lenders.
In this article, we will walk you through the process of obtaining a mortgage if you are self-employed in Ontario, explaining the necessary steps and documentation required. We will also highlight the benefits of seeking advice from a mortgage broker.
STEP 1: Prepare Your Finances
Before you start the mortgage application process, it’s crucial to ensure your finances are in order. Lenders will scrutinize your financial stability and creditworthiness, so it’s essential to have a clear picture of your financial situation.
Review Your Credit Report: Obtain a copy of your credit report from one or more of the major credit bureaus (Equifax, TransUnion). Review it for accuracy and address any discrepancies. Maintain a good credit score by paying your bills on time and reducing outstanding debts.
Build a Strong Credit History: Lenders often look for a consistent credit history. If you don’t have one, consider opening a credit card or another form of credit and use it responsibly.
Save for a Down Payment: Save a substantial down payment, as it can improve your chances of getting approved for a mortgage. A typical down payment in Ontario is 20% of the property’s purchase price.
STEP 2: Choose the Right Mortgage Broker
For self-employed individuals, working with a knowledgeable mortgage broker can be immensely beneficial. A mortgage broker specializes in helping borrowers find the right mortgage products and lenders for their unique financial situation. Here are some advantages of seeking advice from a mortgage broker:
Expertise & Market Knowledge: Mortgage brokers are experts in the lending industry. They have in-depth knowledge of different mortgage products and lender policies, which can be invaluable for self-employed individuals navigating the complex mortgage landscape.
Access to Multiple Lenders: Mortgage brokers have access to a wide network of lenders, including traditional banks, credit unions, and alternative lenders. This access increases your chances of finding a lender willing to work with self-employed borrowers.
Tailored Solutions: Mortgage brokers can tailor mortgage solutions to your specific needs and financial circumstances. They can recommend mortgage products that are best suited for self-employed individuals.
Assistance with Documentation: Mortgage brokers can guide you through the documentation process, helping you prepare the necessary paperwork to support your mortgage application.
STEP 3: Gather Your Documentation
One of the most significant challenges for self-employed individuals is providing the required documentation to prove their income and financial stability. Lenders typically require more extensive documentation from self-employed applicants than from those with traditional employment. Here’s a list of essential documents you’ll need:
Personal Identification: Valid government-issued photo identification, such as a driver’s license or passport.
- Business license or registration documents.
- Articles of incorporation, if applicable.
- Business financial statements, including profit and loss statements and balance sheets, for the last two to three years.
- Business bank statements for at least the last six months.
Personal Income Documentation:
- Personal tax returns for the past two to three years, including all schedules and statements.
- Notice of Assessments (NOA’s) from the Canada Revenue Agency (CRA) for the same period.
- T1 General tax forms, which provide a summary of your income and deductions.
Business Income Documentation:
- Business tax returns for the past two to three years, including all schedules and statements.
- Financial statements prepared by a certified accountant.
- A business credit report, if available.
Proof of Down Payment: Bank statements or investment account statements demonstrating the source of your down payment funds.
Other Financial Assets & Liabilities: Documentation related to other assets and liabilities, such as investments, outstanding loans, or credit card balances.
STEP 4: Determine Your Mortgage Affordability
Before you start shopping for homes, it’s essential to determine how much mortgage you can afford. This involves calculating your debt-to-income ratio, which lenders use to assess your ability to repay the mortgage. Your mortgage broker will do this for you, but it doesn’t help to understand the rationale.
Calculate Your Debt-to-Income Ratio: Add up all your monthly debt obligations, including credit card payments, loan payments, and any other ongoing financial commitments. Divide your total monthly debt payments by your monthly gross income. Multiply the result by 100 to get your debt-to-income ratio as a percentage.
Lenders typically prefer a debt-to-income ratio below 43%, but this can vary depending on the lender and your overall financial situation. A lower ratio is more favorable as it suggests you have a better capacity to take on additional debt.
STEP 5: Prequalification & Mortgage Preapproval
Once you have all your documentation in order and have determined your affordability, the next step is to get prequalified and, ideally, preapproved for a mortgage. Prequalification is an initial assessment of your eligibility for a mortgage based on the information you provide to a lender or mortgage broker.
Prequalification: Provide your financial information to a lender or mortgage broker.
They will evaluate your financial situation and give you an estimate of the mortgage amount you may qualify for. Prequalification is not a guarantee of approval, but it provides a rough idea of your eligibility.
Preapproval: A preapproval is a more formal process that involves submitting your documentation to a lender. The lender reviews your documents, assesses your creditworthiness, and provides a preapproval letter with a specific mortgage amount and interest rate.
A preapproval is a stronger indication of your ability to secure a mortgage and is often preferred by sellers when you make an offer on a home.
STEP 6: Shop for a Mortgage
With your preapproval in hand, you can now start shopping for a mortgage. Your mortgage broker can help you compare mortgage products from various lenders and choose the one that best suits your needs. Consider factors like interest rates, terms, and the type of mortgage (fixed-rate or variable-rate).
STEP 7: Apply for a Mortgage
Once you’ve chosen a mortgage product and a lender, it’s time to formally apply for the mortgage. Your mortgage broker can assist you in completing the application and ensuring that all the necessary documentation is submitted accurately and on time.
STEP 8: Mortgage Underwriting & Approval
The mortgage underwriting process involves a thorough review of your application and supporting documents by the lender’s underwriting team. They will assess your creditworthiness, income stability, and overall financial situation.
Verification of Information: The lender may contact your accountant or tax professional to verify the accuracy of your business and personal financial documents. They may also contact your references and request additional documentation if necessary.
Appraisal: The lender will order an appraisal of the property to ensure its value aligns with the mortgage amount requested.
Mortgage Approval: If your application meets the lender’s criteria and is approved, you will receive a formal mortgage approval letter.
STEP 9: Close the Deal
After your mortgage is approved, you’re one step closer to homeownership. Here’s what you can expect in the final stages of closing the deal:
Home Inspection: Consider getting a professional home inspection to identify any potential issues with the property before finalizing the purchase.
Property Insurance: You’ll need to secure homeowners’ insurance before the closing date.
Legal Representation: Hire a real estate lawyer to review the purchase agreement, handle the closing process, and ensure all legal requirements are met.
Closing Costs: Prepare for closing costs, which can include land transfer taxes, legal fees, and other expenses associated with the purchase.
Finalize Mortgage Documents: Review and sign the final mortgage documents with your lender.
STEP 10: Take Possession of Your Home
Congratulations! You’ve successfully obtained a mortgage and are now a homeowner. On the closing date, you’ll receive the keys to your new home, and the property will officially be yours.
Securing a mortgage as a self-employed individual in Ontario may require more effort and documentation than traditional employment, but it is entirely achievable. Properly preparing your finances, working with a knowledgeable mortgage broker, and providing the necessary documentation are key steps in the process.
Remember that every borrower’s situation is unique, and it’s crucial to seek advice from professionals who specialize in helping self-employed individuals secure mortgages. A mortgage broker can be your ally in navigating the complex mortgage landscape, connecting you with lenders who understand your financial situation and working to find the best mortgage solution for you.
With determination, careful preparation, and the right support, self-employed individuals can achieve their homeownership dreams and enjoy the benefits of owning their own homes.