Where mortgage rumours start, we have no idea. But there are a number of them that say it’s nearly impossible to get a mortgage when you’re self-employed. We beg to differ.
There are over 2.7 million self-employed people in Canada, about 15% of the total workforce, who are self-employed. And we have worked with many clients who have successfully secured a mortgage while being business-for-self.
Likely, this rumour started because getting a mortgage while you're self-employed does require a bit more paperwork and than a salaried employee. Let us explain.
Send in All That Paperwork
Regardless of whether you're self-employed or an employee, a lender wants to know if you can afford to pay back the amount you wish to borrow.
Being self-employed and getting a mortgage really comes down to the paperwork that verifies how much money you’re making consistently over time. Most lenders will want to see your income either consistent or growing over two-three years. If you’re just starting your business, you’ll likely have to wait until the two-year mark to start your pre-approval.
This is a shortlist of the important paperwork needed by your mortgage broker and lender to verify your income and business:
Notice of Assessment and tax returns,
Expected revenue for this year,
Previous revenue from at least the last two years,
Business license (if not sole proprietorship),
Personal and business credit scores,
Proof of HST and/or GST paid in full,
Proof of principal ownership in the business (if not sole proprietorship),
Proof showing that your down payment was not gifted,
Two years of financial statements (if an incorporated business),
Documentation for any other sources of income.
Expert Tip: If you’re employed and thinking about moving to self-employment, talk with your mortgage broker right away. We can help you talk about timing your move as it will be easier to qualify for a mortgage when you’re still employed.
Stated Income Versus Taxable Income
This is likely the most tricky part of getting a mortgage as a self-employed person. Without getting too much into the weeds, there are two ways a self-employed person can use their income to qualify for a mortgage; stated income versus taxable income.
Stated income is the income you state from your business before any deduction. Taxable income is what is actually reported to the CRA for income tax purposes, after deducting all your expenses. To save on paying more income tax, a lot of self-employed people will write down their income as low as possible.
While that can be a smart way to save come tax time, the lower income can hurt your chances of qualifying for a mortgage. Most lenders are going to look at your taxable income versus your stated income when qualifying you for a mortgage.
It is a discussion with your mortgage broker and accountant as to what option works best when getting a mortgage as a self-employed person. There will have to be some trade-offs since you’ll likely have to pay more in taxes if you raise your taxable income or qualify for less if you don’t raise your income.
As brokers, we have access to lenders who really understand entrepreneurs. There are certain policies in place to help “gross-up” business for self income to help with those qualifying ratios under certain programs.
Have Your Taxes Filed and Paid
Speaking of taxes. They are a huge pain for all of us. They especially can be a huge pain if you’re trying to buy a home with outstanding payments.
If you’re self-employed and looking to get a mortgage, you’ll have to make sure your taxes, business and personal, from previous years are filed and paid. We mean all of it.
Having those payments free and clear is going to make your mortgage application go much smoother if you’re self-employed.
Manage Your Credit Score
Unfortunately, some businesses require initial capital to get started. Likely this capital will come from personal credit cards, lines of credit or other loans.
The amount of debt that you have can mean the difference between approved and not approved. That said, if you’re regularly paying your bills, like your cell phone, and making at least the minimum payments on your credit cards, you can still maintain your credit score, making your application more appealing to a lender.
What About Co-Signing?
A family member or friend that is a salaried employee as a co-signer is one way that self-employed borrowers can help their mortgage application if they think there may be challenges applying alone. A co-signer is useful if you are young and have not really established a credit history yet, making you more appealing to lenders.
Expert Tip: You need to make sure to understand the terms and conditions of the mortgage. For example, it is important to know that you will be responsible for the loan if both you and your co-signer default on payments.
Start With A Pre-Approval
A mortgage pre-approval is always the first step of the mortgage process, especially if you are self-employed. During the pre-approval, your mortgage broker will discuss all of the above things with you; income, debts, and credit.
Even if you’re not there yet in terms of having not enough income or carrying too much debt, you’ll at least know where you stand financially and where you need to be to successfully get a mortgage.
Bonus Tip: When you work with a mortgage broker, we have access to certain lender products designed for self-employed borrowers. These could be a great option if you have been denied by your bank.