According to Statistics Canada, there were 2.8 million self-employed Canadians in 2017. Numbers have been steadily increasing every year with the greatest rise in self-employed women at 15% and men at a 4% increase. Although it’s commonly accepted as a sufficient and often lucrative means of income, self-employment still poses challenges when applying for a residential mortgage.
As a self-employed person, it’s in your best interest to minimize your reported income so you pay less tax. Unfortunately this can work against you when it comes time to apply for a mortgage. The lower your income, the less you typically qualify for when applying for financing.
So what can you do to help yourself get approved?
Provide income validation
All financial institutions require income validation for mortgage applications. As a business, you’ll need to provide these documents for the previous two years:
• Notice of Assessment;
• audited financial statements; and
• unaudited financial statements prepared by an independent third party.
Note that some financial institutions will also accept statements of business activities. Having this information available when you apply will make a stronger application.
Support your mortgage application with a strong credit score
If you’ve been relaxed about paying your bills on time in the past, now’s the time to become extremely diligent with paying your bills when they’re due. Keep your credit obligations clean and your credit score as high as possible. You should also resolve any credit issues before you apply.
Filing your taxes on time and paying taxes owed is also important, especially because your Notice of Assessment can be used for income validation.
Reduce your debt-to-income ratio
The higher your debt, the larger the portion of your income is needed to service it. As your debt-to-income ratio increases, your ability to cover your payments falls. Lowering or keeping your debt low by paying off some smaller loans may help you qualify for a mortgage.
Have cash reserves on hand to cover mortgage payments
It’s no secret that income for self-employed individuals can fluctuate. Contracts and available work can vary and there may be periods of time when incoming cash is reduced. Building a couple of months, or more, of mortgage and other bill payments in cash reserves may help you qualify.
Get help from your credit union
For self-employed workers, a credit union may be your best option for mortgage approval because they can often be more flexible than banks in structuring your mortgage. Because you incur extra costs to earn income, they may add an extra 15% to your reported income when calculating your mortgage eligibility. Doing this helps you qualify based on a more accurate picture of your true earning power.
Why should you talk to a mortgage specialist? They can give you valuable advice so you can:
• apply based on your true earning power;
• get a competitive mortgage rate to maximize your purchasing power;
• finance the purchase of a new home, renew your existing mortgage or borrow against your home equity; and
• qualify for a mortgage of up to 95% of your home’s value.
Select the appropriate mortgage solution based on your circumstances, with potentially extended amortization periods.
Contacting a specialist at your credit union is a great place to start, and developing a long-term relationship with your credit union can help. The more they understand your business and finances, the better they can understand your ability to service your debt and get you the mortgage you deserve.
