Working With a Broker Can Help You Get a Mortgage With Rates that Work For You
Increasingly, Canadians are choosing self-employment over traditional 9-to-5 jobs. And who can blame them? The flexibility of being your own boss and working from home (or your favourite coffee shop) is tempting!
But self-employment also means you’re foregoing that steady, fixed income from an employer. While you understand that income waxes and wanes depending on your projects and work, it’s precarious in the eyes of many lenders. To them, self-employment means you’re a high-risk borrower.
If you’re self-employed and looking to buy a home, be ready for a few challenges – but don’t give up on buying property! With the help of a knowledgeable and experienced mortgage broker and some careful planning, you can secure mortgage rates in Ottawa that work for you.
Let’s take a closer look at some of the things you need to be aware of if you’re self-employed and searching for a mortgage:
Why Net Income Matters to Lenders
If you’re like most self-employed Canadians, you claim as many expenses as possible on your income tax return to lower your net income and your taxes owing. It’s a huge benefit when filing your income tax return every spring, but a low net income can be a red flag for certain lenders and underwriters.
Underwriters typically use a debt-to-income ratio to see if you’re a viable candidate for a loan. By comparing net income and your debts, they determine how much of your income goes towards your servicing your debts. As a result, self-employed individuals with lower net income (at least on paper) look like a higher risk.
Of course, some lenders have a better understanding of the situation many self-employed individuals find themselves in and work with you to help you get your home. Working with an experienced and knowledgeable broker can help you find the lenders who are willing to look at the reality of your situation and not just a few figures on a slip of paper.
Common Challenges Self-Employed Buyers Face
Higher Mortgage Interest Rates
Since your net income is lower on paper and your income isn’t as consistent as a standard job, mortgage lenders consider you a high-risk borrower. If they give you a loan, they are taking a bigger risk because there is a higher chance you can’t make monthly mortgage payments.
To offset that risk, lenders tend to charge higher interest rates on mortgages for self-employed borrowers. So you have two options for handling this. Either:
- You accept a higher interest rate and still save on income taxes each year; or
- You claim fewer expenses, increase your net income, pay more in taxes, and potentially find a lower mortgage interest rate.
Keep in mind that if you choose to take the higher interest mortgage, you won’t be stuck with this rate forever. Once you’ve proven that you can make your monthly payments on time, you lower your risk of defaulting and eventually qualify for lower rates.
Tougher Lending & Documentation Requirements
The mortgage application process is usually the same for everyone. You get a mortgage rate quote, fill out an application, sign paperwork, and provide supporting documents.
However, as a self-employed individual, you need to provide more detailed documentation during the application process.
Usually, applicants only need to show proof of income through T4s and pay stubs. If you’re self-employed, though, you’ve got to work a bit harder to prove your actual income. Your mortgage broker will let you know which documents to provide, which can include:
- Financial statements prepared by a certified professional accountant;
- Six months’ worth of bank statements;
- A business license or articles of incorporation;
- Invoices and/or contracts;
- Notices of Assessment;
- T1 and/or T2 Generals;
- Proof that your down payment isn’t gifted;
- Proof that your HST is paid in full;
- Your personal and business credit scores; and
- Other documentation depending on your situation, such as whether your business is a corporation or a sole proprietorship.
Recent changes to mortgage lending requirements don’t help either. It’s now harder to secure a mortgage with lower income. Most lenders ask for a minimum two-year record of income and calculate your debt-to-income ratio accordingly, which presents the challenges discussed above. Thankfully, there are some lenders willing to add back a large non-recurrent expense to increase your net income.
For example, an expensive one-time business fee can be used to adjust the debt-to-income ratio to your advantage. A mortgage broker who understands your business can help you overcome these challenges and find the best mortgage rates for your situation.
Improving Your Chances
Long before you are ready to secure a mortgage and buy property, speak with a mortgage broker to help you plan ahead. Your current and upcoming business and financial situations will influence your chances of getting a mortgage. An experienced, knowledgeable, and well-connected mortgage broker looks at your situation and help you find the best course of action.
Have Good Timing
If you plan to take off time from work, aim to do so after you’ve secured a mortgage. If you take an extended vacation or sabbatical within the two years leading up to your mortgage application, your net income will be even lower. So plan wisely.
Maintain Good Credit
Keep your credit score in good standing so you will appear more trustworthy and low-risk to lenders. The better your credit score, the greater access you’ll have to better mortgage products. Check your credit score online twice a year to make sure it’s in good shape, and to watch for areas you can improve on to ensure you’re in good standing to get credit when you need it.
Keep all your business documents organized and easy to access so when the time comes to apply for a mortgage, you won’t be scrambling to find all the required documents.
Also, make sure your taxes are up to date. You may find it beneficial for you, your taxes, and your mortgage application if you hire a certified professional accountant to file your taxes for you. This will save you plenty of time and headache, and they can optimize your tax returns to help you get a mortgage.
Stated Income or Larger Down Payment
Ask your mortgage broker about stated income. Your mortgage broker can help you secure a mortgage with a stated income mortgage product if you have a low net income. Alternatively, if you offer more than a 20% down payment on a property, some lenders will have more flexibility with lending you better mortgage rates.
Although mortgage interest rates tend to be higher with private financing, this is a good short-term solution if you need to improve your credit score and/or finish a two-year self-employed period so you can show your stated income to lenders.
You can have someone co-sign on your mortgage loan to improve your chances of securing a mortgage. This could be a co-borrower, such as your significant other, who will be buying the property with you and whose name will be on the title. You can also find a guarantor whose name will not be on the title but who will be responsible for the loan if you default on your payments.
While securing a mortgage can be more difficult for self-employed borrowers, it’s not impossible. With these tips in mind, you can have a chance to buy your new home or property with mortgage rates that are right for you.