For those British Columbians who have an entrepreneurial mindset, being self-employed can be a great way to make living.
You have the freedom to set your own hours and decide the kind of work you want to do. There are several tax advantages compared to people who work full- or part-time. And you have the potential to earn a higher income than many traditional salaried positions might offer.
But one area where freelancers, business owners and other self-employed individuals have traditionally been at a disadvantage is when it comes time to buy a home.
Because self-employed workers usually have less stable or predictable incomes than employees, banks and other lenders can sometimes be reluctant to approve them for a mortgage. As a result, it can often be harder for self-employed people to get qualified for a mortgage, or to get the best mortgage rate when they do.
Luckily for the estimated 2.7 million Canadians who are self-employed, getting a mortgage doesn’t have to be an uphill challenge. By doing a little advance preparation and some strategic planning, self-employed people can still qualify for the mortgage financing they need to get their foot on the property ladder, without being hit by a higher interest rate.
Proving your income
For the vast majority of self-employed homebuyers, the first and most important step in getting approved for a mortgage is proving your income.
For traditional employees, providing proof of income is usually as simple as handing over copies of your pay stubs or an employment verification letter. For self-employed people, however, establishing proof of income can be a little more complicated.
To be considered for a mortgage, most banks will require self-employed individuals to provide at least two years’ worth of documented income. So before you even think about applying, gather together as much financial information as you can from the past 24 months for both you and your business, including:
· Copies of your personal tax T1 statements, personal tax returns and Notices of Assessment (NOAs) for the last two years;
· Copies of your last two corporate income tax and GST/HST returns with payment confirmations from the CRA;
· Monthly bank and credit card statements for your personal and corporate accounts;
· Profit-and-loss statements, balance sheets, revenue records and any other official financial statements for yourself or your business;
· Your personal and business credit scores;
· Credit references or letters from your financial institution(s) and the latest audited financial statements from your accountant;
· Proof that your down payment hasn’t been gifted to you, and that you have sufficient cash reserves to cover any unexpected or emergency expenses;
· Proof that you are the legitimate owner of your business, such as your GST/HST licence, most recent business licence or your Articles of Incorporation; and
· Any contracts with long-term clients showing your expected business revenues for the next few years.
Increasing your chances of getting approved
If you have the time, there are also a few other steps you can take to boost your chances of getting approved and getting a better interest rate.
For example, if you are incorporated, you could choose to pay yourself a higher salary in order to qualify for a larger mortgage or a lower rate. It can also be helpful to try to come up with a larger down payment than the traditional 20% of the purchase price in order to reduce the potential risks for prospective lenders.
Some other ways to improve your odds of being approved include:
· Working with a financial advisor or your accountant to improve your credit score;
· Paying off your debts to reduce your debt-to-income ratio;
· Making sure your personal and business bills are always paid in full and on time;
· Working with a REALTOR® to be sure you’re only looking at properties that fit within your needs and budget; and
· Working with a mortgage broker to look at possible alternative types of mortgages, like private financing or a stated-income mortgage for self-employed individuals.
Questions?
Still feeling intimidated or a little overwhelmed? If you’re self-employed or a business owner and you’re interested in learning more about buying a home in B.C. or getting approved for a mortgage, contact us to find out more about what options may be available to you.