How Do Conventional Lenders Calculate Self Employed Income?
To calculate someone’s income for a loan, most lenders only consider the average of the last two years from their tax returns. Before tax write-offs, a lender that is open to stated income mortgage applications will frequently evaluate your last two years of gross reported income before taxes. In certain situations, particular lenders will allow you to provide additional sources of income, such as part time gigs or other self employed work, cash earnings, and so on.
When applying for a loan, several lenders will consider your credit history and score. If you have a lot of past-due bills or balances on your credit cards, prepare to pay them off as soon as possible before submitting an application. You might also use part of the money from your loan to pay off other debts, as you would with a debt consolidation mortgage. A lender may regard high outstanding obligations as a greater risk to their investment.
In Canada, a major benefit of being self employed or owning a corporation is that you can write off specific work-related expenses, including business travel, legal fees, corporate schooling, and business lunches. An employee who draws a regular paycheck usually doesn’t have the same opportunities.
The advantage of writing off these business expenses is that you can pay less income tax. On the downside, though, when applying for a mortgage or loan from a bank, this will limit how much money you can borrow and the interest rate discount the bank might give you.
Looking for a mortgage instead? Read more on how much you can borrow based on your income