Self-Employed Mortgages

Mortgages come in all different shapes and sizes. When we think of mortgages, we tend to think of them in the traditional sense. But self-employed mortgages are becoming more and more common across Canada.

After all, almost 20 percent of all Canadians are self-employed on at least a part-time basis. Despite the rise of self-employed Canadians, it is still objectively difficult for this growing demographic to get the mortgage they need.

There are a few underlying causes for this that continue to propose challenges for self-employed Canadians. We will take a deeper look at self-employed mortgages, what they require, and the challenges that they present.

Self-Employed Mortgages are Tough Because Proving Income is Tough

Why is that the case? Why are self-employed mortgages so difficult to obtain? The first and arguably most important issue is that proving income is not necessarily an easy thing. While it may seem like money is money, getting a cheque from an employer every week is easier to prove than various income streams.

The second reason that this type of mortgage is difficult to obtain revolves around taxes payable. Many business owners look to expense as much as possible to minimize what they have to pay in taxes. Many lenders do not recognize this practice.

The gap between the two sides is narrowing, but it is still difficult to obtain a self-employed mortgage. The best way to combat that is by providing the necessary documentation required from the lender in order to meet their qualifications.

What Do Lenders Require for Self-Employed Mortgages?

There are a few things that the lender will require to approve a self-employed mortgage. Most lenders will require personal tax Notices of Assessment ranging back at least 2-3 years. You would include those Notices of Assessment along with the application for the mortgage.

When self-employed borrowers can verify their income, they can generally access all of the same types of products and interest rates that traditional borrowers can. However, those who struggle to prove their income must provide at least 10 percent in the way of a down payment and have a good credit history to gain approval for a mortgage.

The Notices of Assessment may not be enough depending on the lender. There may be the need for additional supporting documentation when applying for a self-employed mortgage:

• Proof that HST and GST are paid in full
• Business financial statements
• Contracts that show any expected revenue for the next few years
• Proof that the borrower is the principal owner of the business
• Personal credit scores are standard, but business credit scores will be required as well
• Proof that the down payment is not the result of a gift
• An Article of Incorporation or GST license to show the borrower’s business is licensed

The process is so stringent because it is more difficult for the lender to verify financial stability. They view the self-employed as a much larger risk of default than traditional borrowers and require further documentation to ensure that their investment is protected.

 Income

While most borrowers can show proof of steady income from an employer, self-employed individuals must go the extra mile to show that their income is just as secure. This means that self-employed borrowers should provide tax returns showing steady income. Since self-employed individuals are able to obtain more tax breaks, it can make it look as though they possess less income. It’s important to find the right balance between saving money on taxes and being able to show that you’re taking in steady amounts of revenue.

Self-employed borrowers should also be wary of irregular income. If there’s a large disparity between annual income, it can make a borrower seem inconsistent and incapable of keeping up with regular payments.

Debt

Not only will paying off debt improve your credit score, it will also make you look less risky to lenders. An individual who has numerous financial obligations may not be able to stay current with mortgage payments. However, if you can show that you’re relatively free of debt, it will prove that you’re capable of devoting funds to your home loan.

Credit

A high credit score is an attractive quality in any type of borrower, but it may be even more important for self-employed individuals. Showing that you’re financially responsible and able to pay bills on time will help put lenders at ease. In addition, since mortgage rates may be higher for self-employed borrowers due to the inherent risk involved, a higher credit score may help borrowers obtain a lower interest rate.

Savings

Having extra money set aside can go a long way toward putting lenders at ease. If you have a considerable amount of funds in the bank, it will show that even if your regular income takes a hit, you’ll be able to keep up with mortgage payments.

Time

If you’re newly self-employed, you may find it more difficult to obtain a mortgage. Lenders want proof that your income is steady. Making the jump from working for someone else to being self-employed can make lenders wary, meaning that individuals should allow enough time to pass to show that their self-employment will not result in less income. Those who have been self-employed longer will find it easier to prove they are not a financial risk.

Mortgage Default Insurance for Self-Employed Mortgages

Though it can certainly depend on the lender, they will undoubtedly require mortgage default insurance for any self-employed mortgage. Again, the lender views this type of mortgage as a higher risk than a traditional mortgage. The default insurance is to protect them if the borrower defaults on the loan.

When the borrower can prove their income, usually through Notices of Assessment, the mortgage default insurance works as it would for a traditional mortgage. The idea is that the borrower must pay a premium when putting down anywhere from 5 to 19.99 percent. If the borrower is putting down at least 20 percent, then the default insurance is no longer required.

It is always better to put more down up front anyway. The more you put down initially, the lower the amount borrowed is. The lower the amount borrowed, the less interest and the shorter amortization period that the buyer has. It is a win-win for the borrower and the lender.

Consider Using a Mortgage Broker

When pursuing a mortgage of any type, it is always a good idea to have some help. Recruiting the services of a mortgage broker is rarely a bad idea. With as difficult as it can be to navigate the self-employed mortgage landscape, mortgage brokers can offer a significant advantage.

Brokers not only have experience with a litany of mortgage products for borrowers of all types, but they also have greater access to lender rates and products. Those two factors can make a major difference when it comes to getting the right mortgage for self-employed borrowers.

SaskEquity is Here to Help with Self-Employed Mortgages

Still not certain about what a you need to do? Call SaskEquity today.  SaskEquity has the tools, knowledge and experience to help you every step of the way. Going it alone means running into situations that you are not prepared for.

Navigating the market can be tough enough under normal circumstances. When it comes to obtaining a self-employed mortgage, it can be downright frustrating. Don’t go it alone; call SaskEquity to get the guiding hand that you need.

Our team of expert mortgage specialists can help gather the pertinent information needed to get you the best self-employed mortgage rates on the market today. It can mean the difference between getting the home you want and having to settle for something else. Don’t put yourself in that position.