Are you self-employed and finding it hard to get a mortgage? Over 20% of Canadians are self-employed and many of them are financially well off enough to qualify for a mortgage. So what’s the issue?
While many of the major financial institutions shy away from the self-employed, other mortgage lenders are happy to work with them – provided they meet the criteria.
What makes the self-employed different?
Unlike those who are employed by traditional methods, the self-employed, and those who work on a commission basis, don’t receive regular pay or printed T4s at the end of the year. Besides that, their income can be best described as inconsistent. While one month might be exceptionally busy, the next might be unpredictably slow. For this reason, major financial institutions view the self-employed as ‘too risky’ and therefore, often deny them financing altogether.
Using non-traditional lenders
Mortgage specialists are trained to work with candidates of all kinds, including the self-employed. The more complex the candidate’s situation is, the more it makes sense to work with a mortgage specialist. The self-employed can be excellent and reliable mortgage candidates, but they can also be risky. It’s the job of the lender to carefully assess that risk. Rates, although commonly believed to be high for the self-employed, are always best when risk is lowest.
Lowering the risk
Mortgage lenders want to feel that they have chosen a viable candidate. They want to make sure that you can make your monthly payments, no matter what business is like. Here are some of the things business owners can do to minimize risk, thereby becoming a more desirable candidate in the eyes of mortgage lenders.
- Provide proof of income. Typically, mortgage lenders want to see that you have had a steady income for at least 2 years prior to applying. If you are self-employed, you can do this by providing a 2-year average of line 150 on your tax return. Small business owners often claim expenses, making their income appear a lot lower than it actually is. A good lender will look at the amount you bring in before such claims are made.
- Provide other paperwork, including HST returns, incorporation papers and business registration papers. Your lender may require any number of documents. Make sure that everything is up to date and that you can provide copies, if necessary.
- Have a good, strong credit history. This is necessary for all candidates, but especially true for those who are considered riskier candidates. A good credit score will get you far – and it will get you a better rate. It shows that you don’t have problems managing money and therefore increases your level of desirability as a mortgage candidate.
- Be prepared to make a significant down payment. While 10% is usually acceptable, if you are able to put down 15% or 20% the risk for the lender will decrease making your a more favorable customer.
- Location of the business should be near a busy, urban centre. While it’s certainly not important criteria for every lender, depending on the small business, proximity to a busy, urban centre could certainly play a role in whether or not you qualify for a mortgage. Your business’s location could be thought to determine its busyness.
While it can be more difficult for the self-employed to obtain a mortgage, it’s certainly not impossible. If you think you’re ready to purchase your first home and you think that you meet all of the necessary criteria, call around and talk to a few mortgage specialists. No two are created equal and the more questions you ask, the better equipped you’ll be when it comes time to purchase your new home.
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