More Canadians are opting for businesses, entrepreneurship, freelancing and other self-employment paths with statistics showing that about 20% of all working class in Canada is self-employed. With such kind of growth, it is often surprising that it is hard for this demographic to qualify for a mortgage.
Reasons Mortgage Qualification Is Hard For the Self-Employed
Five years ago, things used to be less stringent for the self-employed person when it came to self-employed mortgages. Most lending institutions would give mortgage without hesitation as long as you had a credit score of at least 680.
After the global economic turmoil, the Office of the Superintendent of Financial Institutions (OSFI) decided to take action. This it did by introducing the strict Guideline B-20. Because of these measures, the self-employed worker in Canada has found it difficult to get mortgage approval since the year 2012.
So, how can you make it easier to buy a house without having to forego the benefits that come with self-employment? Here are some Ways to Increase Self-Employed Mortgage Success.
Ways To Make the Process Simpler and Increase Mortgage Success
Prepare Financials And Tax Returns For Two Years
Some of the most critical elements for consideration for mortgage application include financial documents and tax returns. In addition, it is advisable to portray to the lender that you have a steady income by providing bank statements.
Sometimes, getting accounts for two years is not so easy. In spite of that, you can still get mortgage from various lenders in Canada. Remember that not all lenders are on the high street, so survey all the options available.
Update your Tax Status
Lenders check to see if mortgage applicants have any issues with sales tax and income tax returns. In case you owe the taxman, it is important to clear the debt first because it can ruin your chances of getting a mortgage.
Consider Business Incorporation
Lenders also tend to prefer mortgage applicants that have steady incomes. Sole proprietorships and unincorporated businesses may not guarantee a steady salary. Incorporating your business renders you an employee and goes a long way in enhancing your chances of getting consideration for mortgage application.
Give The Lender As Much Detail As Possible
Stated income loans were the norm in Canada prior to the bust in 2008. However, introduction of new regulations made such loans unpopular with lenders. Although there may be a few lenders ready to offer a stated income loan, it helps to be armed with a paper trail showing your earnings and sources.
Some important information to provide to the lender includes breakeven points, monthly expenses, and monthly income. In line with this, the borrower may need the following documents:
- Proof of Goods and Services Tax (GST) and Harmonized Sales Tax (HST) payment
- Business and personal credit scores
- Contracts to estimate your income in the coming years
- Article of Incorporation
The level of disclosure required may differ from one lender to another. Apart from requesting for documentation evidence, some lenders may also analyze your industry before making their decision.
Find an Experienced Mortgage Broker
Overall, your relationship with mortgage lenders is likely to be poor if you are a self-employed worker in Canada. Apart from preparing your paperwork, it is advisable to link with a reputable mortgage broker in your area-this may be all that you need to start building a good reputation and increasing your chances of securing a mortgage.
Different people. Tons of paperwork. Time-intensive steps. If you’re trying to get a mortgage, you must deal with all these factors, and deal with them like you’re running through an obstacle course. The process gets even more challenging if you’re self-employed. The post-global credit crunch has made obtaining a self-employed mortgage in Canada harder. But, it IS STILL POSSIBLE. In the past couple of decades, first-time buyers have seen that it is getting more and more problematic to get a home loan. But, the group that suffered – and are still suffering – the most are self-employed.
That being said, the problem is that a self-employed mortgage doesn’t fit with the traditional loan box. Think of the self-employed as a circle, and the lending box as a square. It’ll take expert maneuvering to make the circle fit into the box. A self-employed mortgage in Canada is hard because a consistent flow of income is not that easy to prove. To fit you into the traditional box, lenders will ask you to present several documents, one of which are copies of your most recent tax returns. Now, most of the self-employed spend as much as they can to lessen their tax payables. That means what’s written in the document doesn’t always mirror the actual take-home. As a result, the income reflected on your tax return is significantly lower than what you actually get. And that becomes an issue when justifying your income with the mortgage rate you want to get.
How to Get a Self-Employed Mortgage in Canada
Most lenders in Canada need your tax Notices of Assessment for the past three years. Also, you need to submit:
- A comprehensive financial statement for your business
- Business contracts that show expected revenues for the next few years
- Your personal credit history
- Your business credit history
- Certifications that prove your HST or GST is wholly paid
- Proof that you’re the sole or principal owner of your business
- A copy of your business license
- Proof that your down payment is from your own money, and not gifted by anyone.
If you can present these documents, it’s likely you’ll receive the same rates traditional borrowers get. If your down payment is between 5% and 19.99%, you still need to pay a premium. But, if it’s 20% or more, you won’t have to. The premium will be added to your loan. Also, if you have sufficient income to qualify for a mortgage, your loan value will be high. You can borrow up to 80% of the property value without default insurance. If there’s default insurance, it can go as high as 95%. If you can’t produce enough proof of income, you at least must have a good credit standing to be eligible for a self-employed mortgage. But, you can only deal with a lender that’s associated with Canada Guarantee or Genworth. Also, you must have 10% of the loan, at least, for the down payment.
Tips to Get a Self-Employed Mortgage in Canada
First off, plan ahead. You need to consider all your options first before making a life-changing decision. Learn as much as you can about mortgages. Use tools like a mortgage affordability calculator to help you manage your finances. The bottom line is that you need to prepare for it. Here’s how:
Adjust your tax.
Two years leading to your mortgage plans, write off fewer expenses in your personal tax. That means you’ll be paying more taxes. The upside of this is increasing your income on paper. If your income can justify the mortgage, it’ll be easy for you to qualify for the loan percentage you want.
Use a licensed accountant.
Most lenders hesitate to trust mortgagees who do their own books. But, they’re quick to believe paperwork is done and submitted by a professional like an accountant. As a self-employed, you should already have a licensed accountant doing your books anyway. A certified accountant has professional experience in dealing with tax implications. He’ll also know what to look for to help you get the rate you want. Let him know what your goals are so he can correctly set up your taxes.
Work with a broker.
Since it’s hard to find lenders that handle self-employed mortgages in Canada, a broker can help you with that. And so much more. Mortgage brokers have connections to different lenders. They also know the ins and outs of the industry. Moreover, brokers can explain to you, in-depth, what stated income is and how it works. Some lenders require mortgagees to present proof of their stated income. A licensed broker can point you in the right direction and teach you how to negotiate this kind of proof. Working with a mortgage broker can help you find the lender that best suits your situation.
Expect to get higher interest rates than traditional borrowers.
There’s no getting around this fact. Most lenders offer low rates to those who fit that lending box. But, a self-employed mortgage debtor is seen as unconventional. Regardless if you have complete paperwork, you’ll still be labeled as a “risk.” As such, you’re automatically under the higher interest rate zone.
Make a substantial down payment.
Part of preparing to get a self-employed mortgage is saving up money for the down payment. If you can, make it more than 20%. If you offer a substantial down payment, the lender’s flexibility increases. They’ll be able to open the box wider to fit you in as a client. They can even see you as someone less risky. There are many variables involved when getting a self-employed mortgage in Canada. And every loan provider has different sets of requirements and demands. Plan accordingly.