By Leanne Mollica
Mortgage Broker | Mortgage Architects – Team Borle
Founder, My Mortgage Strategy
Serving Salmon Arm, the Shuswap, and British Columbia
Self-employed? Hey, me too!
One of the interesting things about being self-employed is that the number on your tax return doesn’t always tell the whole story of how your business is doing.
Your accountant’s job is to help you structure your finances appropriately and make use of the legitimate deductions available to your business.
My job is to help you qualify for a mortgage.
Sometimes those two objectives don’t perfectly align.
I regularly meet business owners who have:
- Strong, established businesses
- Healthy cash flow
- Money in the bank
- Excellent credit and payment history
- Plenty of experience in their industry
And yet, when we look at the taxable income shown on the documents a traditional mortgage lender uses to qualify them, the number isn’t high enough.
The result can be incredibly frustrating.
“Based on the income you’ve reported, you don’t qualify.”
But that doesn’t necessarily mean the business is struggling or that the borrower can’t manage the mortgage payment.
It may simply mean their financial situation doesn’t fit neatly into the traditional lending box.
Why Is It Harder to Get a Mortgage When You’re Self-Employed?
When you’re an employee earning a salary, proving your income can be relatively straightforward.
Your employer provides a letter confirming your employment and salary, you have recent pay stubs, and your tax documents support the income you’re earning.
Self-employed income can be considerably more complicated.
Your business earns revenue, but it also has expenses.
You may deduct legitimate business expenses to reduce taxable income.
You may operate through a corporation and choose how and when you pay yourself.
Your income may fluctuate from one year to another.
There can be a perfectly reasonable explanation for every one of those things.
But mortgage lenders still need a reliable way to determine how much income they can use when qualifying you for a mortgage.
Traditional Lenders Don’t Necessarily Look at Your Business the Way You Do
You might know that your business generates enough money to comfortably support your lifestyle.
Your accountant may know it.
Your bank statements may show it.
But that doesn’t automatically mean a traditional mortgage lender can use all of that money as qualifying income.
Prime lenders generally need documented income that satisfies their particular underwriting guidelines.
Depending on how your business is structured and the mortgage program being used, there may be opportunities to consider certain business income or eligible add-backs.
But sometimes, even after we’ve explored those options, the income a traditional lender can use simply isn’t enough.
That’s where another category of mortgage lending can become worth discussing.
What Is Alt-A Lending?
Alt-A lending sits between traditional prime lending and private lending.
These lenders are designed to work with borrowers whose circumstances don’t necessarily fit conventional lending guidelines.
Self-employed borrowers are a perfect example.
Depending on the lender and program, an Alt-A lender may be able to assess self-employed income differently and consider additional documentation that helps demonstrate the strength and sustainability of the business.
That might include things such as:
- Business and/or personal bank statements
- Business financial statements
- Revenue and deposit history
- Length of time in business
- Industry and type of business
- Credit history
- Assets and available liquidity
- Overall strength of the application
Exactly what can be used — and how the lender calculates qualifying income — varies significantly from one lender and program to another.
That’s why self-employed mortgage applications often require more than simply plugging numbers into a calculator.
But Doesn’t Alt-A Cost More?
Usually, yes.
An Alt-A mortgage will typically have a higher interest rate than the lowest prime mortgage rates, and lender fees may also apply.
At first glance, that can make the prime mortgage seem like the obvious choice.
But this is where I think self-employed borrowers need to look beyond the mortgage rate.
Imagine your current reported income isn’t enough to qualify for the mortgage you need with a traditional lender.
One option might be to work with your accountant on your financial and tax strategy over the next couple of years so that your documented income better supports future mortgage qualification.
Another option may be an Alt-A mortgage that allows you to qualify based on a different assessment of your financial picture.
Neither strategy is automatically better.
You have to do the math.
Sometimes Paying More for the Mortgage Can Cost Less Overall
This is the part that surprises a lot of business owners.
Suppose qualifying for a prime mortgage would require significantly more taxable personal income to be reported over the next two years.
That could potentially mean paying additional income tax.
Alternatively, perhaps an Alt-A lender can approve the mortgage today, but the mortgage comes with a higher rate and a lender fee.
The question shouldn’t simply be:
“Which mortgage has the lowest rate?”
The better question is:
“What is the total cost of each strategy?”
If the additional mortgage interest and lender fees cost less than the additional tax associated with a different income strategy, the Alt-A option may deserve serious consideration.
In another situation, the exact opposite may be true.
Perhaps adjusting the way you’re paying yourself makes sense for reasons beyond the mortgage.
Perhaps you’re planning another property purchase in a few years.
Perhaps the difference in mortgage costs is substantial enough that qualifying on the prime side is clearly preferable.
This isn’t a decision your mortgage broker or accountant should make independently.
It’s a conversation the three of us should be having together.
Your accountant can explain the tax implications.
I can explain the mortgage implications.
And you can decide which strategy best supports your overall financial goals.
Alt-A Doesn’t Have to Mean Forever
Another misconception is that choosing an alternative mortgage means you’ve somehow left traditional lending permanently.
That’s not necessarily the case.
Sometimes an Alt-A mortgage is simply part of a longer-term strategy.
Perhaps we use an alternative lender today because that’s the option that makes sense based on your current documented income.
Then over the next year or two, you work with your accountant on your income structure, continue building your business and maintain strong credit.
When the mortgage comes up for renewal, we reassess.
If you can qualify with a prime lender at that point and moving makes financial sense, great.
The mortgage you choose today doesn’t have to be the mortgage you have forever.
Being Self-Employed Doesn’t Mean You Can’t Get a Mortgage
It does mean that your application may require a little more strategy.
If you’re planning to buy a home, refinance or purchase an investment property, one of the best things you can do is start the mortgage conversation before you’re ready to make an offer.
Give me time to look at:
- How your business is structured
- How you pay yourself
- Your most recent tax returns and Notices of Assessment
- Your business financials, where applicable
- Your credit
- Your available down payment or equity
- Your short- and long-term plans
Then we can determine what the traditional lending options look like and whether an alternative strategy is worth considering.
And if there’s something that could improve your options six months or a year from now, I’d much rather identify it today.
The Lowest Rate Isn’t Always the Lowest-Cost Strategy
This is something I say often because it applies to so many areas of mortgage planning:
The best mortgage isn’t necessarily the one with the lowest interest rate.
For self-employed borrowers especially, we need to look at the whole picture.
The mortgage rate matters.
Lender fees matter.
Taxes matter.
Cash flow matters.
Flexibility matters.
And your longer-term business and personal goals matter.
If you’re self-employed and you’ve ever been told that you don’t show enough income to qualify for the mortgage you want, don’t assume that’s the end of the conversation.
There may be other ways to approach it.
The story behind the numbers matters.
And as a fellow self-employed person, it’s a story I understand very well.