Financial reward, independence, and freedom are just a few of the benefits of being self-employed. Faced with a mediocre job market, more Canadians are looking to self-employment as a way to make ends meat – it’s estimated that as much as 16 per cent of Canada’s workforce is self-employed.
Although self-employment has it perks, it also has its drawbacks. Not only do you have less job security and fewer benefits, you’ll have to jump through hoops just to qualify for a mortgage. While Federal Finance Minister Jim Flaherty’s mortgage tightening rules made it difficult for first-time homebuyers to qualify for a mortgage, that’s nothing compared to the how difficult it is for self-employed individuals to obtain a mortgage.
What is a Self-Employed Mortgage?
When you apply for a mortgage, lenders assess you based on three main criteria – income, net worth, and credit score. If you’re a salaried employee with a steady job, a decent credit score, and you’ve saved up a down payment of at least 20 per cent, qualifying for a mortgage should be a cakewalk. If you’re self-employed it’s another story.
When you’re self-employed, you have the challenge of proving you have the capacity to repay your mortgage. For self-employed individuals, your livelihood is your business. Normally when your business is struggling you can forgo taking a salary, but when you have a mortgage to pay, that’s no longer an option (if you don’t want the bank to foreclose on your home).
How Do I Qualify for a Self-Employed Mortgage?
Before you start house hunting it’s a good idea to get pre-approved for a mortgage. You’ll need to provide documentation to your mortgage lender as proof of your earnings. When you work for an employer, it’s as easy as providing a copy of your T4 slip, but when you’re self-employed it’s not so easy.
Self-employed individuals need to rely on stated income. As the name suggests, stated income is how much you claim to earn. Of course lenders won’t just take your word for it – you’ll need to provide proof in the form of financial statements, client contracts, and recent tax returns.
What Mortgage Lenders Are Looking For
Not all self-employed individuals are created equal. A small business owner with stable earnings over several years is more likely to have an easier time qualifying for a mortgage than a freelancer whose income fluctuates from month to month.
Mortgage lenders are looking for a lot of the same things from self-employed individuals as they do from other borrowers. Steady rental history, a decent credit score, and low debt ratios are all considered golden in the eyes of lenders. It also doesn’t hurt to have a down payment of 20 per cent, as opposed to the minimum down payment of five per cent.
Having a spouse who is a salaried employee can help you when applying for a mortgage. If you’re having issues qualifying for a mortgage, your spouse can always co-sign to lend you a helping hand.
How Do You Prove Your Stated Income
Self-employed individuals will need to supply a lot more paperwork to qualify for a mortgage. Here is some of the documents mortgage lenders request most often:
• Income tax returns and notices of assessment for the last two to three years
• Financial statements
• Client contracts, including forecasted income for the coming fiscal year
• Your personal and business’s credit scores score
• Proof of asset ownership
As you can see, the road to homeownership is a lot more difficult one if you’re self-employed. It’s important to remember that homeownership isn’t for everyone – if your income varies a lot month to month, it might be worth renting instead.
Are you a self-employed individual or small business owner? Have you ever had difficulties obtaining a mortgage?
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.