Getting a mortgage is no easy feat, even when you’re a perfect candidate in the eyes of a lender. But if you’re among the rising wave of entrepreneurs and self-employed workers who’s also a prospective homebuyer, then you have to jump through even more hoops in order to secure financing for a home purchase.
Fern Brunet, owner and mortgage agent at Dominion Lending Mortgage Connection, Inc., says that he’s been in the industry for almost 20 years, and in the last 5-10 years, “there’s been a noticeable increase to that self-employed component, and that’s why there have been a lot of new rules in the banking act, and as far as mortgage insurers and mortgage lenders in that category.”
In 2015, there were 2,759,800 people who classified themselves as self-employed according to Statistics Canada, up from 2,662,400 in 2011. Being in business for yourself doesn’t automatically exclude you from getting a mortgage, although you probably won’t take the most-followed route to get there. Although surveys show that first-time home buyers generally start educating themselves online prior to their purchase, self-employed persons don’t always fit the mold and so financial solutions that fit a buyer with more traditional income sources aren’t applicable. This can create a lot of confusion on the part of the prospective buyer, who thinks they know what they need, only to have a conversation with a mortgage professional and essentially have to get reeducated.
“The majority are rather surprised that it’s not as simple as even having a large down payment. Or surprised that yes, income needs to be proven quite as much,” Brunet says. “It’s very difficult to find a lender that will lend based on equity only and say, ‘Fine, you have 25% down, not a problem, you get a mortgage.’ It doesn’t work that way. They want to see a debt serviceability, and that becomes a big component of getting an approval. And so much more for a self-employed person that’s not showing an income stream that could be regular or even proven sometimes.”
One of the most difficult requirements for getting an income if you’re self-employed is providing sufficient proof of income. Depending on the industry, work can be seasonal or contract-based, and might be steady year over year but not month over month. Generally speaking, two years’ worth of tax assessments should be sufficient for most lenders to prove whether or not you’re a suitable candidate for a loan.
“The straightforward approach is, what does somebody pay taxes on, what do they report as income and we can use an average of that, but the difficulty with that is that a lot of very new self-employed people may not have a two year running average of taxes reported, so that becomes problematic. If they do have a 2 year running average but they’re like many self-employed Canadians trying to reduce their tax burden by underreporting income or overreporting expenses, they’re in a challenging situation there.”
What do you do if you’ve been in the game for less than two-years? There are a few options, and rather than give up on home ownership altogether, Brunet suggests that self-employed people looking for a home should reach out to experts to help guide them through a tricky process. It’s challenging, but it can be done, and mortgage professionals who are experienced when it comes to working with self-employed buyers have the ability to get you the best mortgage interest rates in Canada, a perk usually reserved for the best candidates on paper.
Lenders now carry mortgages that are specifically tailored to the self-employed as well, such as CIBC’s Self-Employed Recognition Mortgage, RBC’s Self Employed Mortgage, Scotiabank’s Scotia Mortgage for Self Employed, and even private mortgage insurer Genworth Canada has a Business for Self (Alt. A) Program. All of these are designed to fit the unique needs of a potential borrower who is either a business owner or self-employed.
Regardless of your source of income, it’s advised that you do things such as paying down your debts and cleaning up your credit before applying for a mortgage. Lenders look at your entire monthly debt load and, according to the Canadian Mortgage and Housing Corporation (CMHC), that monthly debt should not be more than 40% of your gross monthly income. If this number is lower than 40%, and lenders see that you’re responsible with debt management when it comes to consumer credit, then you’ll be a safer candidate in the eyes of lenders.
There are also things that self-employed borrowers need to watch out for before they start thinking about getting a mortgage. The first is overstating income in order to make it appear as if they make more money than they do. It might be an easy thing to do, but lenders are going to scrutinize the finances of self-employed borrowers much more closely than they might with someone who’s traditionally employed. The second is hiding income, i.e., accepting a cheque from a client but not reporting it on the books. This is the opposite of overstating income, and some people do it in order to save money on their taxes.
“Really for a self-employed consumer looking for a mortgage, it’s very, very advisable to speak to a reputable mortgage broker with significant experience, because there are alternatives, there’s options, there’s programs that may look at deposits into their accounts that show income,” Brunet says. “There are programs that may be based on an industry average of what the income is in that industry, there might even be alternative ways of financing.”
Alternative ways of financing can include private or ‘B’ lenders, who don’t tend to be as strict with their lending requirements as an ‘A’ lender. These lenders also come with higher mortgage interest rates, as well as other fees associated with their loans. Still, for someone who is a strong candidate, it can be an option.
“There’s a lot of different approaches, a lot of moving pieces,” Brunet says. “The solutions tend to come from different places.”
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