It doesn’t matter what business you do, whether you’re a start-up founder with the next big idea, or you just opened up your bakery shop, self-employment gives you the freedom of controlling your time and activities.
However, the freedom you get with being your own boss is heavily compromised by the frustration you feel when you try to apply for a conventional mortgage.
There are more than 10% of the Canadian workforce who can claim to be self-employed and more people in this category are resorting to private lenders to secure their mortgages.
As the government sets the bar higher with tougher stress-tests, more self-employed Canadians are opting for private lenders who are constantly increasing their share of the mortgage market. That is instead of dealing with the Big Five Mortage Lenders.
However, for every dark cloud there’s a silver lining, and so it is for the Canadian who wants to meet the self-employed mortgage qualification. In this piece, you’ll find all that you need to know, and all that you need to do to successfully your mortgage as a Canadian entrepreneur.
Factors to consider when applying for self-employed mortgage
As a self-employed Canadian, it is important to understand not every mortgage lender will be ‘champing at the bit’ to sign you on. The fact remains, the “self-employed” fall under the category of people with a higher risk of coverage.
There is typically more paperwork than the usual and a more stringent underwriting process. Little wonder most lenders go for the average T4 employee. And that’s why you have to come to terms with the facts below before you proceed to apply for your mortgage.
Since lenders see you as a borrower with a higher risk, it’s only logical that you could pay more for your mortgage than the average salaried employee.
The first question you need to ask yourself is this; Am I ready to pay extra to secure my mortgage? Besides, how much extra will depend on the lender. And if your answer is yes, then know it’s worth it. And yes, from a financial sense too. The reason is, most self-employed people file their paperwork with little stated income.
What this means is they have to secure their mortgage with unique mortgage packages in the ‘stated income’ category. The result is a higher interest rate than the typical employed Canadian. But when you factor the higher interest rate compared to what’s out there, you will find it is worth every penny.
The alternative – which is you declaring a higher income on your tax returns means you’d have to pay more income tax. And when you compare both choices, you’d see why paying a higher interest rate is an easy decision for your mortgage.
It comes as a surprise the similarity in the mortgage application procedures for the T4 employee and the self-employed. The quotes, paperwork, credit requirements as well as the down payment are similar.
However, the documentation is entirely different. While an employed Canadian needs to produce a few documents to show income, the self-employed must provide more documentation.
Your documentation will also include your financial statements as prepared by a certified accountant and Notices of Assessment amongst many other documents. The number of documents you may need to provide will depend on whether you’re a sole proprietor or the head of a corporation.
Tougher Lending Standards
Lenders willing to assist Canadians secure a self-employed mortgage usually require at least two years worth of earning statements. This means two years declaration of your tax returns which may or may not show your true earnings.
There are other lenders who may assist for less but be prepared to sign up for mortgage packages with higher rates and more restrictive terms.
How To Qualify for A Self-Employed Mortgage
It might look like an uphill task (and yes, it is) but it is possible to secure a self-employed mortgage. Qualifications are tough, but if you follow the tips below, you can be one of the few whose proposal is accepted by a traditional lender.
The first thing to do is to consult a mortgage expert ahead of time before you prepare to secure your mortgage. Factors like your debt profile, your finances projection, as well as expansion plans must be discussed with your broker.
The income you declare annually also plays a role in the type of mortgage package that may be available to you. It is also crucial to water down your expensive write-offs two years to your application because they negatively affect your debt-to-income ratio.
As an alternative, you can declare less income and pay a higher rate which still saves you more money on the income tax department. Confide in a trusted mortgage expert well beforehand and take action accordingly.
Know What You Can Pay For
Mortgages are typically paid on a monthly basis. It doesn’t matter what you do as a self-employed person, it’s vital to make sure your earning power can take care of your monthly payments.
Whether it’s a fixed or variable rate, you have to make sure your the income you make in your slowest months adequately covers your mortgage payments.
Have A Good Tax Record
When you file your mortgage application, you’ll most likely be asked to provide tax information going back two years. It is important your taxes are all paid up. Failing to do so will increase your chances of getting your mortgage application denied.
Keep An Excellent Credit Score
For a typical T4 employee, a credit score within the range of 600 to 650 is enough to secure a traditional mortgage.
However, most self-employed Canadians are required to show a credit score within the range of 700 and above. Higher risk means higher standards. For you to maintain a high credit score, you need to pay off your bills and cards as at when due.
Make sure all your financial and business statements are in good shape. This goes for your Notices of Assessment, tax returns, T1 Generals and many more.
Having your financials in good shape gives the lender confidence you’re fiscally responsible and will help you secure lower rates and healthier mortgage products.
If at the end of the day, you cannot qualify for the RBC self-employed mortgage or other self-employed mortgage packages by conventional lenders, then know it’s not the end of the world as there are other alternatives you’re about to discover below.
As a Canadian looking to qualify for the self-employed mortgage, it is possible the instability of your income may cause you to have a poor credit score.
There are many other reasons you may get rejected but what’s necessary to know is that you can consider an alternative lender. An average alternative lender usually has:
- Charges ranging from 0.5% to 1% higher than the traditional lenders.
- More stringent appraisal policies.
- Charges around 1% of the mortgage value as closing fee for your mortgage.
Alt-lenders provide financial assistance to self-employed Canadians using easier to source documents such as your bank statement of account, work contracts, invoices and many more.
However, unlike the National Bank self-employed mortgage, you won’t need to show proof of paid CRA neither will the alt-lender request for your lines 236 or 150 as a yardstick for your qualification.
Alt-lenders prefer to offer quick-fix solutions usually contracts that are less than five years. They prefer to sign you for a short time in the hope that you’d have qualified for the conventional lending facility before the contract runs out.
Credit Union Financing
More often than not, you may come across a credit union that can help you qualify for your self-employed mortgage. If you don’t know what a credit union is about, then imagine a cross between prime lenders and alt-financiers. Most credit unions want you to show:
- 3 months’ worth of business statements highlighting your current business transactions.
- A minimum of 2 years tax returns.
Credit unions will typically lend you money if your home has a value over C$1M. There are usually no fees to pay but you’ll have higher interest rates to contend with. Credit unions prefer clients of the “investor” with a focus on cap rates and yield rather than mortgage interest.
You must be swimming among the sharks to seriously consider private lenders. You should only consider private lending facilities where there’s an emergency with no foreseeable alternatives.
Most private lenders rarely care about your income statements. They don’t really about your taxes either. Their major concern is how to get their money out of you. They have some of the highest fees and rates in the mortgage market. Of course, there are expetions but not very many.
However, they can close quickly in emergency situations to give you time to consider your next options.
Being a self-employed Canadian is not a walk in the park given the current mortgage market. Be sure to properly consider all the financial options available to you, and get a more informed advice from an expert.
Once you’ve made up your mind to buy a home, ensure you speak to your mortgage broker before filing your tax returns.