Being self-employed has a lot of perks. Rather than working for someone else, you do everything for yourself. Sure, it might mean handling all the aspects of a complex business, and it may mean more hours and stress, but you get the undeniable bonus of freedom and tangible rewards for all the effort you put in. What’s more, you can write-off personal expenses and avoid high tax fees.
However, one area that becomes more complicated if you work for yourself is obtaining a mortgage. Many places may not let you qualify for a mortgage if you’re self-employed. Thankfully this is something that can be worked around and, with the right insight and assistance, you’ll be well on your way to getting a mortgage, regardless of who you work for.
Why It’s a Challenge
Over the last few years, many of Canada’s biggest banks and trust companies have put into place a large number of harsh lending rules that make it more difficult than ever to get a mortgage.
Adding fuel to the flames is the fact that in 2014 the Canadian Mortgage and Housing Corporation halted all mortgages for self-employed citizens who don’t have third-party validation.
This means that where, in the past, you could just declare your income, you now need a trail of evidence that proves this salary and supports your claims. This makes sense from the banking perspective as they want to avoid defaulting and failure to pay, but it’s a hurdle to clear for you.
It is still possible to get a mortgage from a traditional location but it will require reasonable support for your income as well as a strong credit score. As a hypothetical, if you were to put a down payment of less than 20%, you would have to prove to the bank two years of income. Combined with the fact that you may note a smaller income for tax purposes, this can be a challenge.
Alternatively, if you have a down payment of 30% or above, a bank might be more open to giving you a mortgage but considering the sky-high housing prices, this type of saving might be hard to achieve.
How to Get a Mortgage if You’re Self Employed
Even with all these challenges in mind, it’s not impossible to get a mortgage if you’re self-employed. Just be aware that the process is more complicated and convoluted than it would otherwise be, even though lenders have struggled to create a system that is intuitive and clear.
In 2014, the Office of the Superintendent of Financial Institutions (OSFI) released a guideline called B-12. This required any federally chartered lenders to more closely examine any self-employed borrowers. As mentioned above, the net result of these changes was an increase in the difficulty of proving net worth, income and credit score.
Where salaried employees can show a T4, pay stubs and a letter of employment, the self-employed must find alternate ways to verify their income. So, to get a loan for your house, you will need to use a stated income application. Used by borrowers who have a more difficult time proving their income, it is filled in based on how much the individual claims to earn, alongside proof of self-employment and a signed income declaration.
For this application to go through you will need certain documentation. The first is a notice of assessment from the Canada Revenue Agency (CRA). This form should show that you don’t have any outstanding tax payments and acts as proof that you’re reliable and able to pay fees on a timely schedule.
Next, you’ll need an income tax return from the last two to three years. You want to make sure that your return isn’t showing revenue drops or losses, as this will cause them to be more likely to dismiss your application. You don’t have to have a sky-high revenue but definitely avoid applying with a loss.
On the topic of taxes, you’ll need concrete proof that you’ve paid HST and GST fees. You also need evidence that your business is licensed, which can be found through a license or articles of incorporation.
That’s not all. You’ll still need accurate financial statements for your company showing income, revenue, break-even points and expenses. Along with this, you’ll have to have some sort of form that demonstrates how much of the business you own, as well as personal and business bank statements for at least the past half a year, to further prove earnings.
You will also need to prove future profit. You should be able to produce contracts or agreements that demonstrate you will have expected revenue for the next few years. This piece of evidence is very helpful and will reassure lenders of your ability to keep turning a profit while making payments.
As well as all this, you’ll need a down payment that should be at least 15%, although more in this area is always better.
How do lenders treat self-employed people?
Mortgage insurers can classify you based on commission sales and whether you’re a corporation, sole proprietor or a partner. These categories directly impact the qualification process. Being incorporated and an owner means you can fall under the same qualification umbrella as other employed individuals, making getting a mortgage much easier.
If you’re self-employed and not paid a salary, lenders may look at net income rather than gross income. You may also be permitted certain tax deductions and business expenses.
There are a lot of challenges in the way of getting a mortgage if you’re self-employed. It’s only gotten more difficult over time as more qualifications become necessary. Thankfully, it’s not impossible. You will have to produce a lot of documentation, from income forms to proof of business ownership, on top of having a good credit score and an adequately sized down-payment to have a good chance of getting a mortgage.
But homeownership is worth the hardship, and you should not resign yourself to renting for life just because you’re self-employed.