Being self-employed comes with a lot of perks. You can set your own hours, be your own boss, have the flexibility to work as much or as little as you’d like, and the ability to write off plenty of expenses to save money come income tax season. With approximately 20% of income earning Canadians being self-employed, it’s very frustrating that the mortgage industry still tailors their requirements to that of a standard salaried employee. Because of this, if you’re self-employed, buying a house can be extremely difficult.
Possible Difficulties Getting a Mortgage if Self-Employed
One of the main items that lenders consider when deciding to grant you a mortgage or not is your income. While this is no problem for a salaried worker, (who can easily submit a T4 slip) for a self-employed individual, proving income can actually be quite difficult.
As a business owner, being able to write off expenses like meals, workspaces, and vehicles saves you lots of money because the income reported on your income tax return is significantly lower than what you actually took home. While this is a major perk of being self-employed, it can cause a huge headache when the time comes for you to apply for a mortgage. As mentioned above, lenders look at your income to determine if you’re a desirable candidate to loan money to. If you’ve written off enough expenses, your income may not look large enough to afford the mortgage you’ve applied for.
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Self-Employed Income Calculations & Requirements for Mortgage Approval
Self-employed borrowers are usually considered more risky to lenders, which means a lot more paperwork and underwriting is required. As a self-employed buyer, you’ll need to provide at least a two-year history of your self-employed earnings. Lenders prefer to see financial statements that have been prepared by an accounting professional (rather than done yourself). An accountant understands how self-employed taxes should be set up, and with your specific goals in mind, can set up your taxes appropriately. That, coupled with all the time you’ll save, are well worth the price of their services.
A lender will review the documents above, and then check your debt service ratios. These ratios determine how much you can actually afford to pay each month. The two ratios used are the Gross Debt Ratio (GDS) and the Total Debt Ratio (TDS).
The GDS is the ratio of mortgage debt to income. It includes mortgage payments, heating, property taxes, and strata fees divided by your income. The standard acceptable GDS ratio is 35%.
The TDS is the percentage of your income that is required to pay all of your debts each month. It includes all your monthly debts like alimony, car payments, credit card payments, loan payments, etc. All of those payments added up and divided by monthly income provides the TDS. The standard acceptable TDS ratio is 42%.
How to Get a Self-Employed Mortgage in Canada
While getting a self-employed mortgage in Canada often presents challenges, with the right tools it is completely attainable. In order to be considered for a mortgage in Canada if you’re self-employed, be sure you’re able to present the following items upon request.
- Tax returns and notices of assessment for the last two to three years.
- Financial statements (preferably done by a professional accountant).
- Confirmation that all HST/GST payments have been made.
- Recent contracts that indicate expected ongoing revenue.
- Personal & business credit scores.
If all the items above check out, it indicates to the lender reviewing your application that you may be an acceptable candidate for a mortgage loan.
Improving Your Chances of Getting a Self-Employed Mortgage in Canada
If a lender is hesitant after reviewing the items above, there are some ways to improve your chances of getting approved. Such as:
- Add a co-signer to the mortgage application (who is a standard salaried employee).
- Increase your down payment.
- Provide proof of any large assets you own (vehicles, property, business equipment).
One of the best ways to improve your chances of getting approved for a self-employed mortgage is planning ahead. If you know that in two years from now you’d like to purchase a home, your accountant can prepare your taxes more efficiently leading up to your mortgage application by claiming less expenses. Yes, by claiming less expenses you will wind up paying more income tax now, but you will be much better off in the long run. When it comes time to apply for your mortgage, your income on paper will be much higher than if you wrote off every expense, which means you’ll likely qualify for a mortgage much easier.
Benefits of Working with a Self-Employed Mortgage Specialist
It is no secret that in the eyes of a lender, self-employed individuals are riskier borrowers than standard salaried employees. But what people don’t usually know, is that every lender has different rules and exceptions. Some lenders will still accept stated income, which means using an income that you report to them, instead of the income that appears on your income taxes. Other lenders have mortgage products specifically designed for self-employed individuals, so far less hoops have to be jumped through in order to be approved.
The benefit of working with a mortgage broker for your self-employed mortgage is that they have a massive network of banks and lenders at their fingertips. Some of which are not even accessible on the consumer level (so you need a mortgage broker in order to get a mortgage from them.) After reviewing your unique situation, a mortgage broker will be able to match you up with the most suitable lender, greatly increasing your chances of getting approved.
Not only will a mortgage broker research all the available lenders on your behalf, their services are completely free. By working with a mortgage broker you save time by not having to research various lenders, you get access to lenders you wouldn’t be able to on your own, and you’ll likely get approved faster, easier and with a better mortgage product than if you walked into your local bank branch. If you’d like to save as much money as possible, and get approved quickly, there really is no downside to working with a mortgage broker for you self-employed mortgage.
Self-Employed Mortgage: Final Thoughts
Depending on your scenario, a traditional lending institution may not be willing to fund your self-employed mortgage. But there is no need to lose hope! There are other non-traditional mortgage options for self-employed people. It is important to remember that being self-employed can provide you with LOTS of tax savings, so bear that in mind if you receive a slightly higher mortgage rate from a non-traditional lending institution. It is quite likely that you’re still better off paying a slightly higher interest rate when compared to all the income tax that you are saving by being self-employed.