Being self employed comes with lot of perks and freedom, but it has some notable downsides as well. The biggest of which can the difficulty that self employed have qualifying for a mortgage.
Let’s talk about why securing a self employed mortgage can be a challenge and how to improve your chances at getting the financing you need.
Many of the major financial institutions consider self employed people to be fairly risky, mainly because their income is usually inconsistent. Working for yourself can be pretty feast or famine, and this translates to more risk than the big banks are normally comfortable with.
Commission employees face much of the same problems.
Banks typically like to see steady income in the form of a bi-weekly pay stub and that means they will often deny self employed people financing altogether.
More recently, banks have become even more reluctant to consider the self-employed as mortgage material.
Understanding The Stress Test And New Mortgage Rules
Earlier this year, the Office of the Superintendent of Financial Instituions, implemented new mortgage rules meant to cool off the overheated housing markets in Canada’s major cities.
What this essentially means for borrower is that you have to qualify at a higher rate than you did last year, 2% higher to be exact.
The stress test impact more than just self employed people looking for mortgages, but it is another obstacle in their path that makes it more difficult to qualify.
For more on the stress test introduced at the beginning of the year, read What The Stress Test Means For You.
It may sound like a challenge, but securing a self employed mortgage can certainly be done. You will just have to prepare ahead of time and get your finances organized before you start shopping around.
Keep Your Credit Pristine
As a self employed person your credit is more important than it is for most people. Before you apply for a mortgage, get your credit in order and pay off as many outstanding debts and liabilities you may have.
Make sure you have at least two trades with a minimum balance of $2000 open, but keep your balances below the 50% mark. For more info on how to improve your credit check out the series of articles we wrote on the subject.
- Rebuilding Credit And Improving Your Credit Score
- Rebuilding Credit Part 2: Why Your Credit History Matters
- Rebuilding Credit Part 3: Pros And Cons Of Joint Credit
- Rebuilding Credit Part 4: Three Quick Ways You Can Plunge Your Credit Score And What You Should Do Instead
Optimize Your Taxes
Everyone’s favorite subject, taxes. If you’re self employed, that means taxes are a little more complicated for you than a typical employee and also more important in regards to financing.
Speak to your accountant or financial advisor to figure out how to minimize your tax burden while maximizing your reported income. When it comes to qualifying for a self employed mortgage, showing more income will only increase your odds.
You may end up paying a little more in taxes overall, but it may greatly increase your chances of getting the mortgage you need and help you save up the required down payment at the same time.
Next, look at your tax return. You wouldn’t try to cheat the taxman, would you? We certainly wouldn’t encourage it. But if you’re in a largely cash business and not claiming all of it, you’re not only running the risk of facing hefty fines and penalties for tax avoidance, you’re reducing your eligibility as a borrower.
Save a Bigger Down Payment
Banks want you to have some skin in the game before they give you a loan. The more money you have saved up and the bigger the percentage of price of the property you’re able to put up, the more likely a lender will be willing to work with you and the better the terms will be.
You’ll need to have a lot of documentation to seal the deal. Typically, bankers will ask for:
- Three years’ notices of assessment to get a sense your average current income.
- You’ll also need to provide proof (in the form of a CRA Statement of Account) showing that your income and GST/HST is paid up-to-date.
- Bank statements from your business account showing regular, significant deposits also help.
Incorporating your business, which would enable you to pay yourself more traditionally, may also help put your lender’s mind at ease.
But bear in mind that incorporation takes time and money. Incorporation fees alone start at about $1,000, and you’ll incur higher accounting fees to cover the additional filing requirements.
Finally, pull together details on all your other assets: RRSPs, TFSAs, stocks, bonds, equity in business assets, other properties you own and so on.
Get your ducks in a row and have the paper trail to back it all up.
Look Beyond the Bank
The number of mortgage products the major banks offer is fairly limited, especially when it comes to the self employed. Working with a mortgage brokerage is far more likely to get you the results you want.
Not only do mortgage brokers have access to the same self employed products that the banks offer, they also have access to a number of other lenders across the borrowing spectrum.
The more complex your situation is the more likely it is that working with a mortgage broker is your best option.
How to Lower Your Level of Risk to a Lender
Mortgage lenders want to feel that they have chosen a viable candidate. They want to make sure that you can make your monthly payments, no matter what business is like.
Here are some of the things you can do to minimize your riskiness to a prospective lender.
- Provide proof of income. Typically, mortgage lenders want to see that you have had a steady income for at least 2 years prior to applying. If you are self-employed, you can do this by providing a 2-year average of line 150 on your tax return.
- Provide other paperwork, including HST returns, incorporation papers and business registration papers. Like we mentioned above, lenders love paperwork and you’re better off having all your documentation in hand before beginning the process.
- Have a good, strong credit history. This is necessary for all borrowers, but especially true for the self employed. A good credit score is crucial to securing a competitive rate. It also shows that you don’t have problems managing money and decreases you perceived level of risk.
- Be prepared to make a significant down payment. The more you can put down the better.
If you’re in the market for a self employed mortgage, working with an Ardent Mortgages agent is a great option. We have access to over 40 different lenders and can help walk you through the process of finding the best mortgage solution for your situation. Click here to schedule your FREE no obligation consultation call.