Today there are more and more people who are self-employed. In Canada approximately 3 million people either run their own business, are professionals working on commission based salaries or are entrepreneurs.
However, Lenders have always had a difficult time figuring out how to get these individuals a mortgage – let alone good mortgage rates. It has become especially more difficult since the end of 2014, with the introduction of the B-21 rules.
In Canada, the CMHC and Glenworth (which are federally regulated mortgage insurers), are responsible for outlining reasonable steps for Lenders (when it comes to income verification), through the Notice of assessment or (NOA). Right now it is a highly vigorous and demanding process for the self-employed. This is because self-employed people are responsible for ensuring their financial picture is in order -which begins with paying down debt.
Lenders use debt service ratio’s as a major component of the mortgage approval decision making process. The trick is to prepare and have on hand supporting documentation. The following is a list of documentation that you will be asked to supply:
Also, keep in mind that Lenders prefer consistency. So someone who is a “jack of all trades” and master of none, is not what Lenders are looking for. They want to know that you are capable, consistent and experienced in your chosen field of work.
When it comes to the self employed, Lenders also want to know that you can afford and are able to pay the mortgage back. They will base this on income, net worth, and credit score (if you are an employee who is earning an annual salary). This type of income and stability is much easier to prove with T4’s and employment letters. However, if you are your own boss and don’t recieve a T4, the amount you earn and sustainability of your income is a little more difficult to prove.
This means that the self-employed will generally get their mortgages through a process called Stated Income – which is defined as how much you claim to earn. This process requires that you sign an Income Declaration Statement. Proof of self-employment is done through showing business licences or articles of incorporation. These types of files also tend to require higher down payments. 15 to 20% is not uncommon.
It is also extremely important to note that there is no distinction between self-employed and commissioned vs. salaried employees. Most lenders will only consider 80% of gross earnings and an average of the last two years income tax for commissioned individuals and net income – instead of gross income for the self-employed.
However, you should not allow this to discourage you because some lenders allow you to add back some tax deductions like capital cost allowance, housing expenses and car expenses. Others may even allow you to deduct a percentage of business expenses. Plus, if the self-employed have spouses with a salaried position, it makes the file more attractive to lenders – which in turn makes it easier to approve. After all, having another co-signer with good credit on hand works in the applicants favour. Just keep in mind, the co-signers will be also be on title and responsible for the mortgage loan.
So to sum things up, the self-employed path to homeownership needs to be supported with clear and concise documentation. The better prepared you are, the better chance you have of getting mortgage approved.
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