Getting a mortgage when self-employed: What you need to know
With more flexibility, autonomy, and financial opportunity (according to Statistics Canada, self-employed workers have a higher median net worth than their salaried counterparts), more Canadians are opting for self-employment as freelancers, entrepreneurs and business owners.
It would be safe to assume that the path of homeownership would be a relatively smooth one; however, it is not the case. But on the positive side, it is not impossible either. If you are a self-employed worker and looking to purchase a home, don’t be dissuaded. With careful planning and with the consultation from a professional mortgage broker, you can overcome the challenges of obtaining a mortgage successfully.
Why is it more challenging to obtain a mortgage as a self-employed worker?
This was not always the case for the self-employed worker; in fact, a good credit score of 680 or higher was sufficient to obtain a mortgage at most lending institutions. However, this all changed after the economic global crisis which resulted in banking and lending practices across the world to face unprecedented levels of scrutiny. To adhere to this new global shift in our neck of the woods, the Office of the Superintendent of Financial Institutions introduced Guideline B-20 in 2012, which significantly impacted the mortgage approval process for self-employed workers.
Self-employed workers felt the impact the most because how they report income differs considerably than their employed counterparts. With more rigorous lending regulations that require more proof of stated income (there are no T4 slips or regular paystubs for self-employed workers), it is often difficult for self-employed works to substantiate their earnings. As a result, self-employed workers have to provide more documentation and justification when trying to obtain a mortgage; hence, the process can take longer and be quite frustrating.
Other Implications for self-employed workers
Likely be considered higher risk due to the nature of self-employment. Lenders often view income backed by an employer to be steadier and therefore less risky
May have to pay more interest, even if they have a good credit score
Will probably have to pay more up front. Many lenders will require a minimum down payment as high as 30 percent of the total purchase price; higher than the average 20 percent (or less) that is required of a regularly employed applicant with decent credit
Despite the difficulty faced by self-employed workers in obtaining a mortgage, the process can be completed with much more ease and less stress by following these helpful tips:
Have at least two years’ worth of tax returns and financials together
Tax returns and financial documents are elements that lenders use when considering mortgage applications. The more complete your documentation, the better it bodes for your application. It is also helpful to have bank statements, which help convey to the lender that you have a steady income.
Ensure that you don’t owe taxes
Similarly, it is important that all self-employed workers seeking a mortgage remain up-to-date on their income and sales tax returns. If you have fallen behind or you still owe taxes, it can affect your chance to qualify for the right mortgage.
Provide detailed information on your business
Any steps a self-employed worker can take to convey they are not a high risk for lenders will ultimately help in the mortgage qualification process. As such, the more informative you can be about your business, the better. Income, expenses, business milestones, break even points – information like this can improve your chances of qualifying for the mortgage you want.
For self-employed workers who have an unincorporated business or are sole proprietors, it may be advantageous to consider incorporation and pay yourself a salary. This will render you an employee of the business with a steady salary, which can greatly increase the chances of you qualifying for a mortgage.
You can still benefit from the services of a mortgage broker
In fact, you may need the help of a mortgage broker more than most other people. A good mortgage broker will have developed close professional relationships with the members of multiple lending institutions; this gives them additional leverage that can be used to increase the chances of you being approved, as well as obtaining attractive rates.
It is clear, the road to home-ownership for the self-employed worker may be a bit windy than for others; however, by being prepared, confident and strategic, they too can enjoy the fruits of their hard-earned labour as home-owners. If you are a self-employed worker and looking for some advice, contact a MA broker today, they will be happy to assist you in your journey.