A recent Statistics Canada report sheds light on the remarkable count of 2.6 million self-employed Canadians, proudly independent from employer paychecks. Revealing the flexibility of self-determination, they comprise a significant 15% of the Canadian workforce.
Nevertheless, their pursuit of homeownership presents a significant hurdle. Traditional mortgage norms typically cater to those with employers, necessitating stable income verification, a requirement less frequently met by the self-employed.
But don’t worry! Becoming a homeowner should not be a pipe dream for independent workers.
Mortgage Challenges for Self-Employed Canadians
Being well-informed about the tax advantages available to self-employed individuals can lead to substantial savings in income taxes, often amounting to tens of thousands of dollars each year. In some cases, incorporation opens up opportunities for even greater savings by allowing compounding at lower tax brackets compared to individual taxpayers. If you haven’t explored these options yet, it is highly recommended that you consult with your accountant to fully grasp the potential tax rewards of self-employment.
However, amid the numerous benefits, self-employed Canadians frequently encounter a common challenge. Recent changes to mortgage rules have made securing mortgage financing from major Canadian banks an arduous and stressful experience. Even when holding all personal and business accounts at a specific bank, applicants are often faced with rejection, leading to growing frustrations with the country’s banking system. This dissatisfaction is shared by many Canadians due to the prolonged and sometimes broken application process.
While mortgage lenders typically favour a two-year employment history, it is not an absolute requirement. The specific employment criteria for a mortgage can vary depending on the lender and the type of mortgage being sought.
A long-term employment record demonstrates a steady income source and the ability to make loan payments on time, which is favourable to lenders. However, not everyone has had an extensive career, making a two-year employment history impractical in many cases. Fortunately, lenders are aware of this fact and have established guidelines to accommodate candidates who are starting a new job.
How Lenders Evaluate Income for Self-Employed Individuals
When it comes to assessing the income of self-employed individuals, most banks and traditional lenders follow a specific approach. They typically consider the average of the past two years of income reported on line 150 of the borrower’s two most recent tax returns. However, for lenders open to stated income mortgage applications, they may take into account the average of the last two years of gross reported income before tax write-offs.
In some cases, certain lenders may even be willing to consider additional income sources, such as earnings from side jobs like Uber driving or cash income. The rise of the “Gig Economy” has created a demand for more effective mortgage options for those involved in non-traditional employment, potentially making it a focal point of the modern working world.
Apart from income, credit history and credit score are crucial factors in the lender’s evaluation process. If you have significant outstanding debts or high credit card balances, it is wise to reduce them as much as possible before applying for a loan. Alternatively, you might consider using a portion of the loan proceeds for debt consolidation, which could improve your overall financial picture.
One of the significant advantages of self-employment or owning a corporation in Canada is the ability to write off legitimate business expenses, including business travel, legal fees, corporate education, and business meals, which may be charged to personal or corporate credit cards. This strategy can lead to income tax savings. However, it’s important to recognize that when seeking a mortgage or loan from a bank, the practice of writing off expenses could limit the size of the loan you qualify for and the potential interest rate discount offered by the bank.
Applying for a mortgage as a self-employed individual
The traditional mortgage application process is relatively fast and easy. Applicants need to provide proof of their employment income, some bank statements, and their credit score before they receive approval. This process is not as easy for self-employed workers.
Since self-employed home loans are high-risk, applicants will need to provide more documentation than on a traditional application.
Some documents you can expect to provide are:
- Income Documentation: While you don’t have a business, you’ll need to provide evidence of your self-employed income. This can include:
- a. Personal Tax Returns: Your personal income tax returns for the most recent two years, including all schedules and attachments (e.g., T1 General). This will help verify your income and its stability.
- b. Notice of Assessments (NOAs): The Notice of Assessments received from the Canada Revenue Agency (CRA) for the past two years confirms your tax assessment.
- Proof of Employment: If you have contracts or agreements with clients, provide copies of these to demonstrate your income sources.
- Bank Statements for your accounts for the last few months: Lenders may want to see your cash flow and transaction history to assess your financial stability.
- Credit History: Your credit score and credit history play a significant role in mortgage approval. Obtain a copy of your credit report and ensure it is accurate and in good standing.
- Debt Information: Provide details of any outstanding debts, loans, or credit card balances you have. Lenders will assess your debt-to-income ratio.
- Proof of Down Payment: Show evidence of your down payment savings, whether it’s in the form of bank statements or investment account statements.
- Other Assets: Information on any other significant financial assets you own, such as investments or real estate holdings.
- Reference Letters: Some lenders may ask for reference letters from clients or professional colleagues to verify your self-employment status and income.
Keep in mind that the specific documents required may vary depending on the lender and the complexity of your self-employment situation. It is advisable to consult with a mortgage specialist or broker to understand the exact documentation needed for your particular mortgage application.
Tips to improve your chances of receiving self-employed mortgage approval
As we’ve seen, a self-employed mortgage requires a lot of effort and paperwork to be approved. By taking the required actions, you can get ready for your application and position yourself for success.
- Organize Your Financial Records: Gather and organize all relevant financial documents, such as tax returns, business financial statements, bank statements, and proof of income from various sources. Having well-organized records makes the application process smoother and demonstrates your financial responsibility.
- Show Consistent Income: Lenders prefer to see a steady income history. Try to demonstrate consistent earnings over the past two years or more, as this can enhance your credibility as a borrower.
- Minimize Debt: Reduce outstanding debts and pay off high-interest credit card balances as much as possible before applying for a mortgage. Lowering your debt-to-income ratio will strengthen your financial profile.
- Maintain Good Credit: Regularly check your credit score and history to identify and resolve any issues. Aim to have a strong credit score, as this significantly impacts your mortgage eligibility and interest rates.
- Limit Tax Write-Offs: While tax write-offs can help reduce your tax burden, they might reduce your taxable income, which can affect your mortgage eligibility. Consider the trade-off between write-offs and mortgage qualification.
- Consider a Larger Down Payment: A larger down payment can increase your chances of approval and may lead to more favorable mortgage terms. It also shows the lender that you are financially committed to the property.
- Work with a Specialized Lender or Mortgage Broker: Seek out lenders or mortgage brokers experienced in dealing with self-employed individuals. They can guide you through the process and help you understand the unique challenges of self-employment.
- Build a Strong Savings Account: Having substantial savings demonstrates financial stability and the ability to handle unforeseen expenses, making you a more attractive borrower.
- Prepare a Solid Business Plan: If you’re starting a new venture, having a well-structured business plan can showcase your potential for success and long-term financial stability.
- Seek Professional Advice: Consider consulting with an accountant or financial advisor who specializes in self-employment to ensure your financials are optimized for mortgage approval.
- Be Realistic with the loan amount: Request a mortgage amount that aligns with your income and financial situation. Overextending yourself could be risky and reduce your chances of approval.
- Stay Updated on Mortgage Rules: Keep yourself informed about any changes to mortgage regulations and how they might impact self-employed borrowers. Being aware of these updates will help you make informed decisions.
Empowering Self-Employed Homebuyers: Your Path to Homeownership with Cashin Mortgages
Are you prepared to make the homeownership of your dreams a reality? Look no further! Whether you’re a freelancer, entrepreneur, or small business owner, our mortgage company specializes in helping self-employed individuals secure the perfect mortgage for their unique needs.
Don’t let traditional mortgage hurdles hold you back. Take advantage of our expertise and personalized service to navigate the complexities of the mortgage process with ease. Our team is well-versed in handling self-employed mortgage applications, and we’ll work diligently to improve your chances of approval.
Reach out to us right away to start this wonderful journey with us. Your dream home awaits!