Being self-employed in Canada makes up a huge part of our economy. According to Statistics Canada, nearly 2.7 million Canadians work for themselves, making up 13.2% of Canada’s total employment. Out of these 2.7 million people, roughly 1.9 million of them are solopreneurs, meaning that the business they operate is just themselves with no regular, continuously paid employees. Being self-employed carries a multitude of benefits with it. Many self-employed people cite the freedom that being your own boss provides to them, the unlimited earning potential, and the tax advantages available as reasons that working for themselves is so attractive. While all of these things are great, there is one area where being self-employed can create a bit of heartache and headaches for you. That time is when you need to apply for a loan, particularly when you are looking for a large loan, like a mortgage for a home purchase. While all of the advantages of being self-employed remain in place, lenders prefer steady, T4 income that is predictable and has a track record when they are issuing a mortgage. But if you’re self-employed, don’t lose hope! Here is a list of helpful tips that you can use to make the case you present to a lender as strong as possible, even when you’re self-employed.
In This Article
- Make Sure Your Financial Picture is Clean and Clear
- Manage Your Income Tax Situation Professionally
- Some Financial Planning Considerations
- Understand Who You Are Borrowing From
- Most Importantly – Use a Mortgage Broker (Not Your Bank)!
- Keep Hope Alive!
Make Sure Your Financial Picture is Clean and Clear
Having a clear picture of your financial situation is essential if you are self-employed and want to approach lenders about a mortgage. Lenders want to see clean, accurate accounting, often showing a history of up to 12 months of business bank statements.
Tip #1– Make sure that you establish separate personal and business bank accounts. This allows you to separate the income from your business and establish that you have steady cash flow. If you intermingle your personal and business finances in one account, it makes it very difficult for someone at the lender side to see what your business is actually earning to establish your true income.
Hand in hand with this recommendation comes the next item on our list:
Tip #2 – Build up a ‘Mortgage Ready’ collection of your documents. If you are self-employed, you are going to need to provide more documentation than a salaried worker does for a mortgage application. Having ready access to things like your T1 tax returns, Notice of Assessment, GST/HST information, business bank statements, invoices, and signed contracts showing future work that you have already lined up will definitely make your life easier when applying for a mortgage.
By having a clean and clear financial picture as well as ready access to documents, it shows lenders that even though you are self-employed, you are operating a successful business that supports you now and into the future.
Manage Your Income Tax Situation Professionally
One of the big attractions to being self-employed is that there are often many tax deductions available to you that a salaried worker simply doesn’t have. Business owners aim to maximize their deductions every year to reduce their taxable income to the lowest possible level. You need to remember that most of the prime ‘A’ lenders are going to use your net income to calculate your mortgage affordability. This means that whether or not your business is profitable means less than your taxable income, so all those write-offs could be working against your mortgage application.
Tip #3 – This requires some planning ahead. If your goal is to purchase a home in the next few years, you should consider planning with your accountant to be less aggressive with write-offs. Showing two years of higher net income will help your application.
Another thing you need to know is that your taxes need to be filed and up to date for most lenders to consider your application. This can become confusing for self-employed individuals because, unlike salaried workers, the deadline to file your tax return if you’re self-employed is June 15th every year, not April 30th. The complicating factor here is that while you don’t have to file your taxes until June 15 each year, if you owe money, it is required to be paid by April 30th. This means that if you wait until June 15 to pay the amount you owe, your tax account will technically be in arrears, and this could lead to issues with a mortgage application.
Tip #4 – Make sure that you keep your tax account up to date, including paying installments if CRA requests them, so that your mortgage application isn’t derailed by your CRA account showing as being in arrears.
Some Financial Planning Considerations
With the fact that mortgage lenders see you as a higher risk when you are self-employed, you should make sure that you know your credit score and aim to have it as high as you can. Many of the prime lenders want to see higher scores for self-employed borrowers than they do for salaried workers.
Tip #5 – Understand what affects your credit score and try to manage it appropriately. Things like how you are utilizing the credit currently available to you and your payment history play a role in this score, and as a self-employed individual, you want this to be as high as possible.
Another way to open more doors with possible mortgage lenders when you are self-employed and looking to purchase a home is to try to have a higher down payment for the purchase. While you can technically apply for a mortgage with as little as 5% for your down payment, targeting 20% makes the purchase easier because it eliminates the need for mortgage default insurance and allows you access to different lending options.
Tip #6 – With a 20% down payment, you can access programs that look at your stated income, or use your bank statements for income verification instead of what your tax return says. Using your entire business income before write-offs can allow for more likely acceptance of your application.
Understand Who You Are Borrowing From
The Canadian mortgage landscape is made up of a variety of lenders. They all have different underwriting requirements and acceptance qualifications. Understanding who you are borrowing from will make the process easier for you.
- A-Lenders: These are typically major banks and credit unions, along with some non-bank mortgage lenders. They offer the lowest rates but also have the strictest rules when it comes to acceptance of applications.
- B-Lenders – There are options outside of the major banks through Trust Companies and alternate lenders that can cater more towards the business owner markets. They offer things like being able to rely on bank statements rather than tax returns for income verification, but this comes at a cost. That cost is an interest rate that is typically a bit higher than the A Lenders offer.
- Private Lenders – These lenders typically care more about the equity in the property and your down payment rather than your income history. The rates and fees are much higher than the other lenders, so most often private lending is used as a short-term fallback when the other options aren’t available to you.
The bottom line is that if you get turned down by a major bank for a mortgage because you are self-employed, there are options available to you.
Most Importantly – Use a Mortgage Broker (Not Your Bank)!
We highlight this point again and again, but if you are self-employed and you are shopping for a mortgage, you need to be talking to an independent mortgage broker, not the mortgage specialist at your bank. The list of reasons for this is magnified when you are self-employed. If you deal with a mortgage broker, they have access to a huge list of lenders, many of which will specialize in dealing with self-employed individuals. This makes the chance that a mortgage broker can find a solution for you significantly higher than a bank mortgage specialist who only has access to the mortgage products that their employer (whatever bank they work for) offers. An independent mortgage broker, like the team at Strata Mortgages, can help position your application with lenders based on how your income is structured and get you the best possible result.
Keep Hope Alive!
Hopefully, if you are a self-employed individual and you’re considering applying for a mortgage, you have found these tips helpful. Again, the best thing that you can do for yourself is to take the time to talk to a mortgage broker who will get to know you, your business, and what your goals are so that they can help you get into the best possible mortgage solution for your unique situation. Take the time to reach out to Strata Mortgages today and let them be your partner on your journey to homeownership.
