When you’re self-employed in Canada, getting a mortgage can feel like a daunting challenge. Unlike salaried employees, self-employed individuals often face additional hurdles, such as proving consistent income and stability, which lenders typically require to approve a mortgage application. However, with the right preparation, you can navigate these challenges and secure a mortgage that fits your needs.
In this blog, we’ll explore the process of applying for a mortgage for self-employed individuals, the specific requirements you need to meet, and the steps you can take to improve your chances of approval.
Understanding the Self-Employed Mortgage Landscape
Mortgages for self-employed folks aren’t necessarily harder to get; they’re just different. Lenders love seeing a steady paycheck, but when your income fluctuates, you’ve got to paint a clear picture of your finances.
Instead of just flashing a pay stub, show them the whole scene – the entire financial story of your business and how you can repay the loan. Lenders want to minimize risk, so show them you’re stable. In 2023, the Canadian Bankers Association reported that more self-employed people applied for mortgages, but their approval rates were a bit lower, which shows how important it is to be prepared.
Demonstrating Income
Proving your income is the big hurdle. Most lenders want to see at least two years of financial records to get a good handle on your situation. Here’s what they usually accept:
- Notice of Assessment (NOA): This is like the gold standard. It’s from the Canada Revenue Agency (CRA) and shows your reported income. Lenders trust this document, as it’s an official record of your tax return.
- T1 General Tax Form: This form gives a broad look at your income, deductions, and credits, giving lenders the big picture of your finances.
- Financial Statements: Statements put together by a certified professional accountant are great – audited ones are even better. They detail your business’s income, expenses, and profits, giving insights you can’t get from other documents.
- Bank Statements: These back up what your financial statements say, showing money coming in and going out.
- Contracts and Invoices: Showing ongoing contracts and invoices proves you have a solid income stream, which makes lenders happy.
Important thing to remember: While those deductions are great for taxes, they can lower the amount you can borrow for a mortgage. Lenders look at your net income (what’s left after deductions). So, find a good balance between saving on taxes and maximizing your chances of getting approved. Talk to a tax professional about what works best for you.
Navigating the Requirements for a Self-Employed Mortgage
Besides proving your income, there are other requirements for a self-employed mortgage you’ll need to make sure are in order:
- Credit Score: Good credit is a must, no matter what you do for work. Aim for 680 or higher to get better interest rates and loan terms. Pay your bills on time, every time. A score over 700 significantly increases your chances of approval.
- Down Payment: A bigger down payment can seriously boost your chances and might even get you a lower rate. While the minimum down payment rules still apply, putting more down shows you’re financially responsible. If you can manage 20% or more, you can also skip CMHC insurance.
- Debt Service Ratios: Lenders will calculate your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. These ratios show the percentage of your income to cover housing expenses (GDS) and all debts (TDS). Keeping these ratios in check is super important for getting approved. Aim for GDS below 39% and TDS below 44%.
- Business Stability: Lenders want to see at least two years of business operations, but more is even better. A longer track record says you’re stable and lowers their risk. Some lenders even like to see three or more years to see a well-established pattern.
Common Challenges and Solutions for Mortgages for Self-Employed Individuals
A common worry is showing too little income on your taxes. Here’s the fix:
- Re-evaluate Deductions: Before you start the mortgage process, think about whether you can cut back on deductions to slightly increase your reported income for the past couple of years. While deductions are great for taxes, think about how they affect your borrowing power.
- Consider Alternative Lenders: If banks aren’t biting, check out credit unions or mortgage investment corporations (MICs). They’re often more flexible with self-employed borrowers. Just be aware that this flexibility might mean slightly higher interest rates.
- Use Asset-Based Lending: Some lenders might look at your assets (like investments or savings) to make up for a lower income, especially if you have a big down payment. This focuses on your net worth rather than just your income.
Income jumping around can also be a problem. Here’s how to handle it:
- Documenting Income Trends: Show that your income has been generally going up over the past two years, even with occasional dips. Tell a story of growth and resilience.
- Using a Co-Signer: A co-signer with good credit and a steady income can really strengthen your application. It gives lenders extra peace of mind.
- Waiting It Out (If Possible): If your income is currently low but expected to rise soon, consider waiting until you have two years of better income to show.
Proving Your Business is Thriving
Lenders want to know your business isn’t just making money now but will continue to do so. Do these things:
- Maintain Detailed Records: Keep super-organized records of all income and expenses. Good bookkeeping makes it easier to prepare financial statements and give lenders what they need, so use accounting software to make it easier.
- Develop a Business Plan: Put together a thorough business plan that shows how serious you are about your business’s future and that you know your target market. Include projections, market analyses, and your long-term vision.
- Secure Professional Advice: Talk to a financial advisor or accountant. They can give you expert advice on managing your finances and getting ready for your mortgage application.
Working with Mortgage Services in Canada that Understand Self-Employment
Getting a mortgage when you’re self-employed takes skill. Working with mortgage services in Canada that specialize in self-employment mortgages is ideal. We understand the challenges you face and can fight for you with lenders.
A good mortgage broker can:
- Assess Your Situation: Thoroughly check out your finances and figure out the best plan for you.
- Identify Suitable Lenders: Connect you with lenders who know how to work with self-employed folks in Canada.
- Negotiate on Your Behalf: Get you the best interest rates and loan terms possible, saving you money.
- Streamline the Application Process: Give you expert guidance to handle all the paperwork and make the application process easy.
Getting a mortgage when you’re self-employed in Canada is totally possible. Know the requirements, address potential problems, and work with experienced professionals, and you can confidently get through the process and achieve your dream of owning a home.
Ready to make it happen? Contact EquityRich.ca today to check out your self-employed mortgage options and take the first step toward your dream home. Our expert team will give you personalized guidance and support.