Mortgage for Self-Employed Individuals
A vast majority of self-employed individuals do not feel like the banks are treating them fairly. It seems to them that banks always look for a reason to say no. Be it their business, personal loan application or their mortgage application, the outlook is not always favorable.
One of the reasons self-employed individuals have such a hard time with the banks is the income they declare in their tax returns. Self-employed individuals are allowed to write off expenses necessary to run their business. This in turn reduces their declared income, thus negatively affecting the maximum mortgage amount they could be approved for.
The good news is there is a mortgage program designed specifically for self-employed applicants. This program allows to use stated income instead of the income declared on the tax return. The key is the declared income has to be reasonable to the line of work.
Other requirements are:
- Strong credit
- 2+ years of self-employment
- At least 10% down from own savings
Stated income must be reasonable for the line of work. The banks will ask to provide the last Notice of Assessment to confirm what income was actually declared. It is fine if it is less than stated income. It is a problem, if it is way less. For instance, if we state 60K in annual earnings and NOA shows only 10K.
Under this program, mortgage insurance premiums are sugnificantly higher. For instance, with 10% down, the premium is 5.45% of the mortgage amount. In other words, it is 5,450 for every 100K borrowed. Compare it to 2.40% for applications with actual declared income (for employed individuals or also self employed, when using actual declared income).
With 15% down, the premium drops to 3.35%, 20% down – 1.90% and with 25% down it is 1.15%.
Mortgage insurance premiums under this program are quite high. Yet, with 35% down, no mortgage insurance is required. Compare that to 20% down with most applications with actual declared income. The banks will ask to confirm that besides the 35% down payment, the applicant has extra savings to cover the mortgage and property tax payments.