The benefits and rewards of being your own boss are many and though the basic rules for applying for a mortgage are the same, being self-employed can make the application process a little trickier, though definitely not impossible. Many banks even offer mortgages specifically designed for people who own their own business or are self-employed.
Let’s explore some things to consider when purchasing a home when you’re self-employed.
Writing off business expenses is a major perk of being self-employed and many people who fall into that category are motivated to expense as much as possible in order to minimize their taxes payable. However, because many lenders don’t take that into account, some financial professionals suggest writing off fewer expenses in the two years leading up to your application. That will give you a higher income, and though that could result in a higher income tax bracket, the increase in documented income might help you get approval for a larger mortgage.
HOW TO SHOW INCOME
There are 2 basic methods people who are self-employed can use to show income:
Declared income: Most lenders require personal tax Notices of Assessment from the past 2 to 3 years be included with your mortgage application. If you’re able to provide this proof of income, you can generally access the same mortgage products and rates as traditional borrowers. In addition to your Notices of Assessment, a lender may ask you to provide supporting documentation, such as:
• Financial statements for your business
• Proof that your HST and/or GST is paid in full
• Contracts showing anticipated revenue for the coming years
• Your personal and business credit scores
• Proof you’re a principal owner in the business
• A copy of your borrower’s business or GST licence or Article of Incorporation showing you’re licensed
• Proof your down payment has not been gifted
Stated income: Essentially, a stated income is an option in which the lender uses a benchmark industry standard of earnings for your field of work, typically in the two years prior to you becoming self-employed. The lender may look into the average income of someone of that same profession as a comparison for proof of income. Lenders use this option on a case-by-case basis so be sure to ask if it’s a feasible option for you or not.
OFFSETTING RED FLAGS
Because you’re self-employed, your income may not always be as steady or as predictable as an employee of a company. Though you may still earn a solid income, self-employed borrowers are typically seen as a higher risk and may therefore be required to pay a higher interest rate than someone who’s not self-employed.
This shouldn’t deter you from owning a home but is something to consider and to discuss with your mortgage broker. If possible, offset those red flags by offering a larger down payment. Although dependent on your lender and reviewed on a case-by-case basis, a higher down payment might give you more options when it comes to financing a home purchase.
Also, paying all income tax owing on time and maintaining a clean credit history will demonstrate to lenders you’re serious about both your business and home ownership.
If you’re self-employed, you may have experienced income level fluctuations from month-to-month. If you don’t already have an emergency fund, consider building one before trying to qualify for a mortgage.
As mentioned above, some banks offer mortgages designed especially for people who are self-employed or business owners, sometimes by leveraging the equity in their current home. Navigating which lenders specialize in self-employed mortgages or have more favourable terms for the self-employed can be challenging so using a mortgage broker may be helpful. They have access to multiple lenders and have a broad knowledge of the mortgage market and can therefore connect you to the lender most suited to your situation.
MORTGAGE DEFAULT INSURANCE
If you can prove your income through your Notices of Assessment, mortgage default insurance works the same for a self-employed mortgage as it does for a traditional mortgage: you have to pay a premium if you’re putting down between 5 and 19.99%, which will be added to your mortgage and paid off over the life of your loan. All three mortgage default insurance providers (Canada Mortgage and Housing Corporation, Genworth Canada or Canada Guaranty) offer mortgage default insurance.
If you can’t provide sufficient proof of income, you must put down at least 10% and will need to find a lender who uses Genworth or Canada Guaranty, as only those two providers offer mortgage default insurance for stated income files.
I’ve helped numerous clients who own a business or are self-employed achieve their home ownership dreams. Whether you’re self-employed or working within a company, I’m happy to help you understand your options and will work diligently with you to find you the home perfect for you and your family!