Self-employed: how lenders read your income

If you are self-employed, you and your accountant have spent years making your taxable income as small as legally possible. Then you apply for a mortgage and a bank uses exactly that number. This guide explains what the lender is doing, and the three routes around it.

Route one: a prime lender using your returns

The lender takes line 15000 from your last two personal tax returns and averages them. If the latest year is materially lower, usually more than 20% down, it uses the lower year instead of the average, on the theory that the business is shrinking.

Some lenders then add back certain expenses that reduced your taxable income without reducing your cash: capital cost allowance, business use of home, sometimes a portion of vehicle expenses. That can add thousands to the usable income. Which add-backs, and how much, depends on the lender and on whether the mortgage is insured.

This route gives you the best rates. It needs two years of returns, Notices of Assessment showing taxes are paid, and proof the business is active.

Route two: a stated-income program

Some lenders accept an income you state, provided it is reasonable for your trade and supported by evidence: six to twelve months of business bank deposits, contracts, invoices, a business licence. These programs cost a little more and usually want a larger down payment, and they exist precisely for people whose returns understate what the business earns.

Route three: an alternative lender

When the returns are too new, the income is irregular, or credit needs time, an alternative lender can approve a file a bank cannot. Rates are higher and there is a lender fee. The point is not to stay there. It is a one to two year bridge with a plan to move to a prime lender at renewal, once the returns catch up. We show the total cost before you decide, and we write down the exit plan.

If you were declined

A bank decline is rarely explained. It is usually one of four things: the two-year rule, the lower-year rule, debts that pushed your ratios over the limit, or the property. We find out which, fix that, and then choose the route. Sending the same file to the next bank is not a strategy.

Before you apply

Talk to us before your year end, not after. Sometimes a mortgage is easier three months after filing than three months before, and a small change in how expenses are claimed can change the outcome. Try the income estimator for a first look, then talk to Juan.