A growing number of Canadians are turning to self-employment as their main source of income. A majority cite the independence and freedom of working for themselves as the main reasons for striking out on their own. There are a lot of benefits of being your own boss. However, as any self-employed people will tell you, there are also many challenges. Getting a mortgage can be one of them because the rules governing mortgage approval in Canada are not friendly towards self-employment. If you are self-employed and thinking of buying a home, renewing or renegotiating your mortgage, here are some things you should know about self-employed mortgages in Canada.
Proving Your Income
The big banks have stringent rules that must be followed when qualifying lenders for a mortgage. They will only accept certain forms of documentation as proof of income—typically pay stubs or a letter stating your annual income from your employer. Banks like to see a history of regular employment income coming into your bank account as proof that you have a stable income. Unfortunately for self-employed people, regular income isn't always a reality, nor are pay stubs. Instead, banks will ask for at least two years of financial statements or tax returns as proof of income.
The Income Paradox
One of the perks of self-employment is using your business expenses to offset your income for tax purposes. Minimizing your net income is a common and accepted practice. However, banks won't recognize it when considering a mortgage application. They only see the bottom line.
Another factor that goes into mortgage approval is the ratio of your income to the debt you hold. Banks are looking for your income to debt ratio to be below a certain threshold to secure approval. Minimizing your bottom line can artificially lower the ratio, putting you under the threshold for approval.
Credit Rating Matters
Keeping your credit score high is one of the most important factors affecting your mortgage application. Maintaining a good credit rating proves to lenders that you have financial stability and provides some reassurance that your business is well-managed. Paying your bills on time, avoid maxing out credit cards and lines of credit for long periods of time, also help to keep your credit score high.
Are You Destined to Pay Higher Rates?
So what if you haven't been in business for long enough to have financial statements and tax returns? Does it mean that you can't get a mortgage or that you'll only be approved with high interest rates? This isn't the case at all. As self-employment becomes more common and financial institutions modernize their practices, some are now accepting alternative forms of income verification. Credit unions and alternative lenders are more friendly to self-employed applicants because they are exempt from the Bank of Canada rules such as the mortgage stress test.
Talk to an Expert
Navigating the application process for a new mortgage when you are self-employed can be confusing and discouraging. Work with a mortgage broker who can help you understand what documentation you need for income verification. Mortgage brokers will find lenders who are more likely to accept your application and offer the best rates.
Dave Destefano and the Mortgage Group in Niagara falls works to find you the best interest rates and the right mortgage product to suit your financial situation. Call 905-933-1090 or book an appointment for a consultation today.