Mortgage Qualification for Self Employed Albertans
Qualifying for a mortgage when you are self employed is different from qualifying for a mortgage for a t4’d employee. While the basic mortgage qualification criteria remain the same (enough income to make the mortgage payments, strong enough credit to prove your ability to mage your bills, and enough down payment to ensure that you as the homeowner have some ‘skin in the game’), there are certain tweaks to the mortgage qualification criteria that have been made for people who are self employed.
The 3 main criteria for mortgage qualification – for self employed Albertans
1. Down Payment
Just like we’ve stated in previous posts, qualifying for a mortgage can be complicated, but it does not need to difficult. In essence, three factors will determine your ability to qualify for a mortgage, whether you are attempting to get your first mortgage, or 100th mortgage with a 5% down payment – even if you are self employed: credit, income, and down payment. You need to be able to demonstrate that you’ve been paying your bills, that you have the income to handle the new expenses of home ownership, and lastly, you need to have a down payment. When self employed, these fundamental three factors for mortgage qualification remain, however, since your income can change based on market conditions, the baseline criteria for each qualification group have been ratcheted up. Let’s now look at each of the three mortgage qualification criteria, but specifically for Self Employed Albertans
Mortgage Qualification Criteria 1: Down Payment
Before even looking at the Credit, and Income related mortgage qualification criteria for self employed borrowers, you must understand that there are 3 types of mortgages for self employed borrowers: full doc qualifying income mortgages, low doc qualifying income mortgages, and fully stated income mortgages. The three types of mortgages have very different down payment requirements. We will be discussing the income requirements for each type of mortgage later on in this article, however, here will are simply explaining the down payment related implications of each mortgage type.
With full doc qualifying income, and strong credit, self employed Albertans can purchase a home with a minimum down payment of 5% of the purchase price of the home they are looking to buy –just like any T4’d employee.
With low doc qualifying income, and strong credit, self employed Albertans can purchase a home with a minimum down payment of 10% of the purchase price of the home they are looking to buy.
With the fully stated income mortgages, down payment requirements go up dramatically. For this program, self employed Albertans can purchase a home with a minimum down payment of 20% of the purchase price of the home they are looking to buy.
Mortgage Qualification Criteria 2: Credit
Regardless of which type of mortgage you select, as a self employed Albertan the credit requirements for mortgage qualification remain strict. You are required to have a minimum of 2 forms of credit(credit card, auto loan, student loan, line of credit, personal loan, etc) active for a minimum of 24 months, with a minimum required credit score of 620 with the full doc mortgage, and 650 for the low doc qualifying income mortgage.
The fully stated income mortgages have case based credit requirements, meaning that the credit requirements depend upon the overall credit profile of the person applying for the mortgage. In essence, for these products, mortgage lenders are looking for very clean credit profiles -no late payments, collection, or over the limit accounts within the past 12 months are basic necessities.
Mortgage Qualification Criteria 3: Income
Your income is the most important factor in determining which type of mortgage you’ll be able to qualify for as some who is self employed. As discussed above, there are 3 types of mortgages available to self employed Albertans:
1. full doc qualifying income
2. low doc qualifying income
3. fully stated income
Qualifying for a full doc qualifying income mortgage involves averaging a person’s most recent 2 year’s Notice of Assessment income. Basically, in order to purchase a home with a 5% down payment when self employed, you would only be able to qualify for a mortgage based on what you are personally declaring for income.
Qualifying for a low doc qualifying income mortgage involves looking at the overall income picture of the self employed individual. In this scenario, the mortgage broker will collect the most recent 2 year’s company financial statements for the applicant’s business(es) and determine a ‘reasonable’ income based on the net income, and gross margin of the business. In this situation, the left over income from the business can be added to the most recent 2 year’s personally declared income, however, it is not a cut and dry procedure. The process is incredibly subjective, and it is therefore important to make sure your mortgage broker is comfortable reviewing financial statements.
Qualifying for a fully stated income mortgage surprisingly involves more documentation. For these types of mortgages, the mortgage broker will review your personal, and corporate bank statements, company financial statements, and personal income tax filing documents to understand what your entire income situation looks like. There is substantially more leeway involved in this process, and therefore, more income from the business can be used for income qualification. This process is again highly subjective, and therefore, it is imperative that you ensure that the mortgage broker you have selected is completely comfortable in reviewing financial statements.