I am self-employed, how do I get a mortgage?
With almost 1 in 5 Canadians being self-employed, it’s time we discussed how these applicants can go about getting a mortgage approved.
Be Prepared
Clearly organized, well-documented tax filings are going to really show lenders that you are a reliable and trustworthy potential mortgage holder. Make sure that everything you need to qualify for a product is already included your application package. First up, we’ve put together a checklist of documents to provide when applying for a mortgage.
This includes:
- Business license
- Articles of incorporation
As well as 2 years worth of:
- T1 general tax returns
- Bank statements
- Profit and loss accounts
- Balance sheets
For an even more favorable chance of getting your mortgage approved, see if you can go back further than two financial years; especially if your business has incurred a regular income for you. It will also be necessary for all tax deductions to be backed up by relevant evidence, such as receipts and invoices.
Now, what for those of you who don’t fit these criteria? For instance, those who are recently self-employed. Well, as long as you have been working in the same field you can use pay cheques to prove your prior earnings. This should get you over this particular hurdle in your application.
Income validation
This can either be in the form of your notice of assessments from the last two years or financial statements produced by an independent third party. As of 2014 the Canada Mortgage and Housing Corporation (CMHC) no longer accepts mortgage applications without income validation so this step is crucial.
Net income
You would probably not be reading this article if you weren’t shrewd on how to run your business. You’re probably aware that writing off expenses is an excellent way for self-employed individuals to make tax savings. However, for the next two years, you’re better off cutting back on this if you’re thinking about applying for a mortgage.
Doing this will increase your net income which makes lending providers see you as a less risky investment. This is a frustrating factor for self-employed Canadians as unless they have a very consistent, reliable take-home pay over the last two years it’s very hard to get a mortgage. That’s before we even factor in having a 10% down payment.
Tax deductions previously beneficial to your finances, by minimizing your net income, are best avoided in the run up to a mortgage application.
Any major investments, such as an expansion processes, can really negatively affect your eligibility for a mortgage at this present time. You may be willing to take that self-induced pay cut but it may not look feasible to give you a loan based on your net income.
Hidden/ inflated income and hidden debt
The absolute worst thing you can do to destroy your chances of obtaining a mortgage is stretch the truth or show a distorted picture of your finances. You need to be stringent in recording every transaction and remove any unrecorded cash-in-hand dealings if you haven’t already done so.
Overstating your income will likely do more harm than good. You may end up in the stressful dilemma of having repayments that are beyond your means if you do get through the application undetected. As for concealing debts, your dishonesty will weigh against you as a trustworthy borrower and the likelihood of getting caught is high.
Pay off your debt
Debt-to-income ratio is so important when trying to take out any kind of loan. The more debt you have accumulated the higher the income you need in order to service that debt. So, before getting excited about taking out a mortgage you need to tackle your credit rating to make the process worthwhile for you. I’m not saying you have to be debt-free in order to get a mortgage. However, paying off loans here and there is not only good practice but also shows them that you are proactive in managing your finances.
The nature of a business is built on risk and many self-made businessmen and women will have experienced bankruptcy. This does not write you off immediately. Although it will for the short term. Again, it’s a matter of building your reputation back up, getting your credit history into good shape and applying in two years with a steady take-home pay.
Chartered or Certified Accountant
If you are seriously considering applying for a mortgage then your lending providers want to see it. By hiring an accountant you are ensuring a certain level of transparency and a professional attitude towards your business. I recommend certified as some banks specify this, so by paying more you are covering more bases. They will enable you to present your business as a reliable, consistent source of income. A good accountant will also provide savvy business recommendations that will not only benefit your application but your business as a whole.
Business Types
The structure of your business is also a really important aspect to consider when in the initial stages of application. For instance, if you are a sole trader then naturally enough they will be looking into your accounts. However, if you have entered into a partnership then lenders will also need to see your partner’s accounts. If they have a poor credit rating, this often is a mark against you in your application. Finally, for a limited company, you must make the lender see your investment not only in terms of your basic salary but in conjunction with your dividends.
Larger Down Payment
So, as I’ve mentioned most lending providers are going to be looking for at least a 10% down payment for self-employed applications. However, if you can provide a 20%+ down payment you suddenly become a much more enticing investment. In these situations, providers may decide to forego insurance and take the mortgage out directly with you. This is the ideal scenario and will mean considerable long-term savings in your repayments.
Residential
Finally, try and stay rooted to the same property for the next year or two. Lenders’ eyebrows can raise at an applicant who has no real fixed address over the last few years. As I’ve said, it’s all about proving that you are a risk-free customer.
