The Ultimate Guide to Buying a Home When You’re Self-Employed

Younge couple embracing while speaking with realtor

Almost half (45%) of Canadians will be self-employed by 2020, according to Intuit. In some cases, these individuals are supplementing employment income by working on the side. But the trend is clear: self-employment is becoming increasingly common in Canada. Here’s a look at how being self-employed can affect the mortgage buying process, along with some tips to help get you into a new home.

Proving Income as a Self-Employed Canadian

When applying for any type of mortgage, the bank requires proof of income. For those who are self-employed, the process can be a little more complicated. There are two main ways business owners, freelancers and independent contractors can prove their income when buying a home:

  • Proved income: The average amount you’ve earned over a period of time, typically at least two years.
  • Stated income: A reasonable estimate of your income based on the type and size of your business. Typically, you can only use this method if you’ve been in business for at least a few years. Mortgages approved using stated income may have higher fees or interest rates.

Whether you’re planning to prove or state your income, keep detailed records of your business activities, including revenue and expenses for each year. The more supporting documentation you can provide to the mortgage lender, the better.

Always Declare Self-Employment Income on Your Tax Return

Filing your taxes properly is crucial to ensure the mortgage process goes as smoothly as possible. When applying for a mortgage, failing to declare self-employment income may come back to bite you. If you haven’t disclosed all of your revenue to the government, a lender might not recognize that income when determining whether to give you a mortgage.

Protect Your Credit Score

Self-employment can be unpredictable. However, try your best not to make purchases with credit that you can’t pay back on time. A poor credit score will hurt you when you’re applying for a mortgage and can impact how competitive a rate your lender can offer you.

The following are a few factors that affect your credit score:

  • Payment history
  • Percentage of credit used
  • Length of credit history
  • Recent credit inquiries
  • Types of credit used

To keep your credit score in top shape, pay your bills on time and try not to max out your credit limit too often. Ideally, your balances shouldn’t be more than 30% of your available credit for any given credit facility. Also avoid closing old accounts, even if you plan to stop using a particular card since a long history of credit usage can improve your score.

Save Before You Borrow

If you’re unsure whether you’ll be able to get a mortgage, consider saving for a large down payment before you apply. Coming in with a significant percentage of the home price already saved shows a lender that you’re serious. Decreasing the loan-to-value ratio (the portion of the home price being borrowed) can improve your chances of having the lender approve your loan.

After you gather all the necessary materials, you’re ready to start shopping around to find the right lender for you.

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