MORTGAGES FOR THE SELF-EMPLOYED
You can still get that mortgage.
There has been plenty of talk in the news lately about how getting approved for a mortgage as a self-employed entrepreneur has become more difficult thanks to stricter lending guidelines.
While it is true that documenting your income is simpler if you work for a company that provides you with regular pay stubs and a salary, it’s also true that getting a mortgage when you’re self-employed is still an attainable goal.
The guidelines may have changed, but with a few considerations you can still fit within them and therefore qualify for a mortgage. Being a successful self-employed person is something to be congratulated on – not penalized.
GET YOUR NOTICES OF ASSESSMENT
When it comes to documenting your income as a self-employed person, a lender is going to want to see your Notices of Assessment going back 2 years.
This is the document that the Canadian Revenue Agency (CRA) sends you after you’ve filed your taxes. This document shows that you’re declared earnings, and how much tax you owe (or rather, hopefully it shows that you have no taxes owing).
Depending on how your business is structured (i.e. if you’re incorporated or not), you may need to provide your company financials or your T1 generals, including a statement of business activities to further support that you make as much money as you say you do.
Other ways to confirm business activities are a business license or articles of incorporation, but the level of scrutiny varies from lender to lender.
If you’ve recently launched your own business and have less than 2 years history then things get a little more complicated.
If you’re doing the same job as you did at your previous position then lenders will typically accept your income. However, if you quit a salaried position in order to start a completely unrelated business then you’re going to have to put in those 2 years in order to get approved by a regular lender.
There are also Alt-A lenders who will look at stated income based on your gross income and 35% down payment, or 10% down payment with mortgage default insurance (i.e. CMHC).
MAYBE CONSIDER PRIVATE LENDING
There are options in the private lending sector if you don’t fit into the boxes outlined above. A private mortgage will cost you more in interest and will typically have some fees attached, but private lenders are a lot more flexible in terms of who they’ll lend to and will prioritize the marketability of the property over the details of your application.
Another important thing to consider when you’re self-employed and looking for a mortgage is the actual features of the mortgage itself.
It is standard in the industry to allow borrowers to pay an extra 15 – 20% of the initial loan amount back in addition to the regularly scheduled payments, but some lenders will take the extra paid back and then allow for a certain number of skipped regular payments. This can be beneficial for people who have seasonal work or uncertain pay schedules.
You may also want to consider a readvanceable mortgage, or one that is paired with a line of credit in order to give you a more flexible cash flow. These kinds of mortgages, while not transferable without incurring legal fees, can be paid down and drawn from again as needed and generally without fees from the lender.
The most important part of getting a mortgage when you’re self-employed is keeping yourself organized.
Keep copies of your tax returns and business related documents in order to streamline the process, and have the conversation about buying a home early (with both your broker and your accountant) in order to plan out the next few years.
Knowing where you’re going and how you’ll get there will make a huge difference.