When it comes to qualifying for a mortgage, lenders tend to consider a variety of factors. One of the main things that lenders consider is income, and tax returns typically give a good indication of income for individuals seeking a mortgage.
For the self-employed, however, the situation can be a bit more complicated than for salaried employees. Tax deductions can be extremely helpful for self-employed individuals, but a frequent result of taking advantage of such deductions is a taxable income that may be insufficient for qualifying for a mortgage.
A common example of this is when a self-owned corporation is performing well but personal income figures are low. Individuals may decide to forego an income from the company if, for example, they have other sources of income and do not need to take a regular salary. Issues can arise, however, when the individual takes too little money as an income from their occupation, as low regular income figures can cause problems when it comes to applying for a mortgage.
When taxable income is insufficient, self-employed individuals can use the “stated income” approach in order to prove a higher amount of income in the mortgage application process. In this method, the mortgage broker declares your full income to the lender, and the lender considers your gross income, as indicated on your two most recent Notices of Assessment. Having these records is important for establishing income history, which lenders weigh heavily in the mortgage process.
Using the stated income approach, you can thus demonstrate adequate income to be able to pay off a mortgage. Part of the consideration, however, is whether the gross income figure listed in your records matches typical earning for individuals in your occupation.
If the numbers are consistent with income amounts that are common for your field of occupation, you should have access to more favorable mortgage structures. For property purchases, a 10-percent down payment is typically required. For rental properties, most lenders ask for 20 to 25 percent down, at least in the case of “A” lenders.
Inconsistencies within the field can create more complications. Because the figures are less reliable for the lender, they may require you to make a larger down payment, and you might also have to bring in a partner with enough demonstrable income and a sufficiently high credit rating in order to help you qualify for the mortgage.
So, while your tax returns may show low income figures, you can still qualify for a mortgage using the right income declaration strategies.