If you're looking for a mortgage as a self-employed individual here in Canada there's a mountain you're going to have to climb to get it. Self-employed mortgages don't come easy in this country for a variety of reasons that all boil down to 2 main issues for the lender.
Why is it More Difficult to Get a Mortgage When You're Self-Employed?
- Income from a small business is a lot harder for the mortgage lender to document than the income coming in from a base salary.
- Most people that are self-employed can have waves and then lulls of money flowing in. This adds a certain risk for defaulting on the loan that many lenders don't want to touch.
What Advantages Do You Have When You're Self-Employed?
As a self-employed professional you are entitled to certain tax benefits that salaried employees cannot use. You can write-off certain business deductions such as mileage on your car, gas costs, home utilities costs and a host of other things when applicable. Anyone that is self-employed will claim all of the benefits that they are legally entitled to in order to pay the least amount of taxes. Makes sense. The problem is that to a lender the amount showing on your income tax statement may not be enough to qualify you for a mortgage.
How to Get a Mortgage When You're Self-Employed
Self-employed individuals make up approximately 20% of the income earners in this country. This is a wide segment of the population that cannot walk into their local bank and get an easy approval on their mortgage. Most of these people will have to turn elsewhere to get a home loan.
If you work for yourself your best and easiest route to finding a loan is through a mortgage broker. While there are mortgage programs that have been designed specifically for self-employed people, you're not going to find them at your local bank. It is important to note, however, that while it will be a harder process to get accepted at a bank for a self-employment loan, it is not necessarily impossible.
You May Need a Higher Down Payment and Better Credit
If you are self-employed and prefer to have a traditional mortgage arrangement with an A-list lender, you may need to have a higher credit score and a larger down payment than other borrowers. While good credit is great to have, you will be considered a higher risk due to the fact that most business owners have fluctuating income levels that can leave lenders leery. Financial experts, realtors and brokers recommend that you aim for an excellent credit rating of 750 or better if you are self-employed. As a bonus, the better your credit score, the better mortgage rate you’re likely to land.
Because of the Canadian Mortgage Housing Corporation’s decision to require third-party confirmation of income for self-employed applicants, it is essential that you declare all of your income for at least two years prior to home shopping. It is advised to have a minimum of 20% ready for a down payment for the average buyer, but if you work for yourself you should plan on forking over a 30% down payment for traditional lenders. If you don’t are aren’t willing to declare full income or can’t verify enough to qualify, start looking into private lenders who are more lenient with self-employed buyer requirements.
If you have been turned down for a loan because you work for yourself you should contact a mortgage broker to find out your options. In many cases a mortgage will be available for you through other channels that are legitimate but also more flexible than traditional banking institutions.