SELF-EMPLOYED - The Two Year Rule

Being self-employed and qualifying for a mortgage can be easy. We need to do a little upfront work before we apply for your mortgage. We need to understand what lenders want to see.

The golden rule for the self-employed is a two-year history of income.

Lenders treat the self-employed income differently than a traditional salaried job. The self-employed income is variable from year to year. What income we made last year does not guarantee that we will make the same income this year. We know as self-employed that some months are great and some months not so great. This variable nature of our income adds risk for the lender. It is hard to predict what income our business will generate year over year.

This is why lenders require a two year history of your self-employed income. These two years is a good predictor of what your income will be going forward. Lenders take the average of these two years. Ideally, we are looking for consistent income from year to year or an increase in income year over year. Declining income is not a good story.

For example, a self-employed engineer shows income of $80,000 in 2018 and $86,000 in 2019. The average used by lenders is $83,000 [(80,000 + 86,000)/2]. It is this average of $83,000 that the lender will use for qualifying income, not the current year of $86,000.

Lenders are trying to figure out what you can afford. Nobody wants to put you into a situation that you cannot afford or that you struggle to make your mortgage payments. These guidelines come from decades of lender experience with self-employed mortgages.

Contact Us
For more information on mortgages for the self-employed, contact your local Mortgage Broker, Sean Stewart at 905-427-9596 or sean@seanastewart.com