For London, Ontario's thriving community of entrepreneurs, freelancers, and small business owners, the dream of homeownership can sometimes feel like an uphill battle. The traditional mortgage application process, designed for salaried employees with consistent T4 income, often doesn't fully capture the unique financial landscape of the self-employed. However, the good news is that securing a mortgage in London as a self-employed individual is absolutely achievable with the right knowledge and approach.

The Self-Employed Advantage (and Challenge)

Being self-employed offers incredible flexibility and control over your career and finances. You get to be your own boss, set your hours, and often have the ability to deduct a significant portion of your business expenses. While these deductions are fantastic for tax purposes, they can present a challenge when it comes to proving your "true" income to a mortgage lender. Lenders primarily look at your net income – what you declare on your tax returns after deductions – which can appear lower than your actual gross earnings.

Navigating Income Verification

This is where the self-employed mortgage process diverges from the traditional path. Lenders have adapted to cater to diverse income streams, offering various ways to verify your financial stability:

• Traditional Income Verification (Tax Returns/NOAs): Many lenders, especially the major banks ("A lenders"), still prefer to see your Notice of Assessments (NOAs) and T1 Generals (or T2s for corporations) for the past two years. They will typically take an average of your net income from these years. If your most recent year's income is higher, some lenders may consider that as the primary figure. This method is best for those with established businesses and consistent, clearly declared income.

• Stated Income Mortgages: This is a popular option for self-employed individuals who write off a lot of expenses, resulting in a lower declared net income. With a stated income mortgage, you "state" your income, and while you don't need extensive tax documentation, lenders will still look for other forms of proof that your stated income is reasonable and sustainable. This can include:

  • Bank Statements: Many lenders will analyze 6 to 12 months of your business or personal bank statements to demonstrate consistent cash flow and deposits. This provides a clear picture of your actual earnings.

  • Business Licenses and Articles of Incorporation: These documents prove the legitimacy and structure of your business.

  • Contracts and Invoices: For freelancers and contractors, long-term contracts and a history of invoices can showcase stable future income.

  • Industry Experience: Lenders may consider your previous experience in your industry, even if your self-employment history is shorter.

• Gross Business Income: Some lenders are more flexible and will consider a portion of your gross business income (Line 162 on your T1 Generals) to determine your qualifying income, even after certain write-offs.

• "Add-backs": A knowledgeable mortgage professional can help you identify legitimate business expenses that can be "added back" to your net income for mortgage qualification purposes. These might include capital cost allowance, vehicle expenses, home office deductions, and one-time business expenses.

Down Payment and Credit Score: Key Factors

Regardless of your income verification method, a strong financial foundation is crucial:

• Down Payment: While some self-employed programs allow for as little as 5% down (with mortgage default insurance), a larger down payment (often 20% or more) can open up more options, potentially reduce interest rates, and in some cases, eliminate the need for mortgage default insurance. Stated income mortgages often require a minimum of 10% down, and to avoid mortgage default insurance, a 35% or higher down payment may be necessary.

• Credit Score: A good credit score (generally 620 or higher for A lenders, and potentially lower for B or private lenders) is always a significant factor. It demonstrates your reliability in managing debt. Make sure your credit report is clean and accurate.

• Debt-to-Income Ratio: Lenders will assess your Total Debt Service (TDS) ratio – the percentage of your gross income that goes towards housing costs and other debts. They typically look for a TDS in the 39-44% range for A lenders, though B lenders might be more flexible (e.g., under 50%).

Understanding Lender Types

London, ON, offers a diverse lending landscape for self-employed individuals:

• A Lenders (Traditional Banks): These are your major banks (RBC, TD, CIBC, etc.) that typically offer the lowest interest rates but have the strictest income verification requirements, often relying heavily on NOAs.

• B Lenders (Credit Unions, Trust Companies): These lenders are more flexible than traditional banks and are often a good option for self-employed individuals with less conventional income structures or slightly lower credit scores. They may be more open to using alternative income verification methods like bank statements.

• Private Lenders (Individuals/Firms): Private lenders offer the most flexibility in terms of income and credit requirements. They primarily focus on the equity in the property. While they can be a short-term solution for those who don't qualify elsewhere, they typically come with higher interest rates and fees.

The Role of a Mortgage Broker in London, ON

For self-employed individuals in London, partnering with an experienced mortgage broker is highly recommended. Here's why:

• Access to Multiple Lenders: Brokers work with a wide network of lenders, including those specializing in self-employed mortgages (A, B, and private). This significantly increases your chances of finding a suitable product.

• Expertise in Self-Employed Mortgages: A good broker understands the nuances of self-employed income, including how to best present your financial situation and utilize various income verification methods.

• Negotiating Power: Brokers can often negotiate better rates and terms on your behalf by having multiple lenders compete for your business.

• Streamlined Process: They guide you through the often-complex application process, helping you gather the necessary documentation and addressing any lender queries.

Planning for Success

If you're self-employed in London and dreaming of owning a home, here are some actionable tips:

1. Maintain Excellent Records: Keep meticulous records of all your income, expenses, invoices, and bank statements.

2. Consult an Accountant: Work with a professional accountant who can help you optimize your tax returns while also considering your future mortgage goals.

3. Build a Strong Credit History: Pay bills on time, keep credit utilization low, and have a mix of credit products.

4. Save for a Down Payment: The more you can put down, the better your options and terms will likely be.

5. Start Early: Begin conversations with a mortgage broker well in advance of when you plan to buy. They can help you strategize and prepare your finances.

While the path to a self-employed mortgage in London, ON, might require a bit more preparation than for a salaried employee, it's a well-trodden path with many successful homeowners at the end of it. With careful planning, thorough documentation, and the guidance of a knowledgeable mortgage professional, your dream home in London can become a reality.