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 the self-employed. In 2015, as per Statistics Canada, about 14% of the total population of Canada were independent workers. That percentage reflects the residents that maintain a lifestyle financed by their own earnings. That also means being self-employed is a feasible means of making income.
That being said, the problem is that 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 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 mortgage 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.