Self Employed Mortgages – How to get a mortgage when you are self employed.
At the end of 2017, Statistics Canada reported 2.8 million Canadians as self-employed. This accounted for nearly 15% of the labor force across Canada. Around half a million Canadians identify themselves as self employed every year. It is however difficult to pinpoint an exact number, as the definitions of being self employed is vague. In general, being self-employed can mean running your own business, work as a freelancer or on commission, have a professional career, run your own farm or any other such entrepreneurial vocations.
With an increasing number of self-employed individuals, lenders are still figuring out how to make it easier for them to obtain a mortgage and get the best interest rates. Changes unveiled in July this year by Canada Mortgage and Housing Corporation were aimed at giving lenders more guidance and flexibility when it came to self-employed borrowers. In these changes CMHC said several factors could be now used to support a lender’s decision to give a mortgage to self-employed borrowers who have been running businesses for less than 2 years or have been in the same line of business for less than 2 years. The factors could include things like:
· Acquisition of established business
· Cash reserves
· Prediction of earnings
· Training or Education received previously
CMHC stated that those type of applications could be accepted provided that a strong rationale is noted in the lender’s loan file. Under guideline B-21 introduced by the Office of the Superintendent of Financial Institutions (OSFI) at the end of 2014, a federally chartered bank can only lend 65% of the purchase value of the property to self-employed professionals, 10% points less than previously allowed before requiring a mortgage default insurance. However, some credit unions that are not federally regulated, do not need to follow the B-21 guidelines and can lend up to 80% without the need of a default insurance, though at a higher interest rate.
Being able to pay your loan back is the biggest concern of the lender. Therefore, to asses this, lenders look at three factors: Income, Beacon score and Net worth. Having a job makes it easier to prove your financial stability. An employee earning a salary can show T4 slips or a letter from an employer stating their earnings. Not being employed and not having an employer to provide such income proof makes it harder to verify whether your income is stable. Self-employed professionals typically obtain their mortgage through stated income applications which require a signed income declaration and proof of self employment. Stated income is basically to claim how much you earn. You will have to back this up with the following documents:
· Income tax returns for the previous 2-3 years.
· Notices of Assessment from the Canada Revenue Agency to confirm that you have no tax liability.
· Proof that your GST and/or HST is paid in full.
· Copy of Articles of Incorporation or your business license that shows you are licensed.
· Financial statements of your business. You might also have to explain your business, its income, expenses and when you expect to breakeven.
· Proof showing you are the principal owner of the business.
· Client contracts that can show expected revenue for the upcoming years.
· Available down payment of at least 5%.
Besides looking through your proofs of stated income, the lender will also look at your debt service ratios. The debt service ratio calculates how much you can afford to pay monthly to own a home. You will also need to have a good beacon score. If you are not sure of what your beacon score is, or need to have it checked, a quick way is to contact us, and we can have it done for you immediately. It is advisable to pay down your credit cards and lines of credit before you let the lenders score you. For self-employed individuals, it’s important to have less debt than someone who is salaried.
The main difference between self employed and salaried employees is that lenders will need a 2-year history of your self-employed earnings, well as salaried employees will be able to use the gross amount of their earnings at the time of application. A lender will only consider 80% of gross earnings as well as the average of last tax year’s income for commissioned sales people. Certain lenders may allow you to add back some tax deductions to your income, like car expenses, advertising, capital cost allowances and housing expenses. Other lenders may agree to simply add a percentage to allow for business expenses.
It is important to keep your income consistent. If you are a sole proprietor and claiming gross/net business income on your T1 Generals, maintain consistency year by year to avoid complications in your mortgage application. If you are incorporated, you can pay yourself a salary, a dividend, or both. Whichever you choose, keep it consistent as well.
Reach out to us for more information and find out how we can tackle these challenges for you and get you the best interest rates and terms in the market!