For full-time employed people, it is easy to verify that you have the income available to make your regular mortgage payments. All you need to do is get your most recent pay stub and your most recent T4 and that is usually all you need; however, if you are a self-employed individual or a contractor, then proving your income could be a lot more difficult then you would think.
What Documents you Need if you are Self-Employed
When you are planning to apply for a mortgage and you are self-employed, then it is best to make sure that you have collected all the required documents before looking for a property to buy. The first thing that you need to know is that most lenders will average your last three years income. If you work for yourself, then you will need your last three years Notice of Assessments. The underwriter reviewing your income will average your previous three years income to determine your current income.
If you own and operate your own business, then you will need all your accounting documents, your T1 Generals, and your Notice of Assessments for the past three years to qualify for your mortgage. You will also need to provide statements of business activities. If you have the documentation showing the registration of the business, then you will have to provide this as well.
Once you have collected this documentation, the first thing you should confirm is that you have no outstanding taxes. If you have outstanding taxes, then the bank will consider this as a form of collections, and they will not be able to fund your mortgage until after you have paid off your outstanding taxes.
Most self-employed, contractors, and business owners gross down there income as much as possible in order to reduce there tax brackets. This could have a negative impact when trying to apply for a mortgage, and you may be unable to qualify for a mortgage.
What to do if you do not have Proof of Income?
If you do not have sufficient proof of your income or you have not been self-employed for long enough, then you may not have enough income in order to qualify for the mortgage. You may not have any income at all available to apply for the mortgage. Most mortgage insurance companies understand this, and they have developed insurance programs to suit these self-employed individuals.
For example, you have been self-employed for one year, and you have only been making 6 figures for one year. Before that you were barely making $30,000. The income that you have available is not enough to qualify for a mortgage, so you can use this program to qualify.
Also, if you are running a business, but you have not filled your taxes yet, then you may be eligible to apply for one of these programs. Another example is if you had grossed down your income way too much, and you are now unable to proceed with a mortgage.
What is the Premium of this Mortgage Insurance?
When you have no other choice, you may have to take this more expensive form of insurance. This insurance will run you a large premium over normal insurance, and could be more than double what the average mortgage insurance premium costs. Be prepared to hear a large number when you ask what the insurance premium is when you are using one of these programs.
If possible, then it is best to wait until you have sufficient income and sufficient proof of income in order to make the purchase because you may pay not only thousands, but tens of thousands of dollars in order to be able to purchase the home that you had be searching for.
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#1 by Barbara on April 22, 2009 - 8:47 am
Very good and useful information!