By Jordan Lavin, for Ratehub.ca
More and more Canadians are taking on some form of self-employment. The side hustle is more popular than ever among millennials, with more people than ever making some money on the side in addition to their regular full-time job. And more than 1.5-million Canadians are fully self-employed, running their own businesses and working for themselves.
Self-employment is the dream and eventual goal for many Canadians. And there’s another goal that’s extremely popular here, too: homeownership.
For those who are trying to live both dreams simultaneously, however, there can be big obstacles in the way. Mortgage lenders want stability in their customers. They value full-time employment, lengthy tenures with single employers, letters of employment and trails of paystubs. For self-employed people who lack all of these things, buying a home can be a big challenge.
But that isn’t to say it can’t be done. If you’re self-employed and hoping to become a first-time homebuyer in the near future, here’s how you can qualify for a mortgage.
Build up your income history
One of the biggest factors in mortgage affordability is income. When calculating how much mortgage you can afford, lenders use a calculation called debt service ratio that compares your cost of living directly to your income. To qualify for a mortgage, the two biggest levers you can pull are to look for a less expensive home, or make more money.
That can cause a major wrinkle for people who are self-employed because lenders want to see two full years of earnings history from their self-employed customers. Even if you’re making more in self-employment than you did when you were employed by a company, it doesn’t count for much in the eyes of lenders unless you’ve been at it for a few years at least.
Mortgage lenders will typically ask for documents like your notices of assessment (NOA) going back two years to make sure you can consistently earn the income you say you can. They’ll more than likely take the average of the two last years, so if you had a bad year or were still ramping up to the income you’re at currently, you’re not going to get credit for the money you make currently.
Save up a bigger down payment
Size matters to lenders, especially when it comes to down payments.
The amount of money you put up on your own to buy a home signals three things. First, it shows lenders you have the ability to save money and live within your means. Second, it shows lenders that you’re willing to shoulder more of the risk if things go wrong. When you have more equity in your home, your lender is less likely to lose money if you default. Third, a bigger down payment lowers the amount of your monthly payments, leaving some breathing room in your debt service ratio. You can use a mortgage payment calculator to see just how much your monthly payment will go down when you increase the size of your down payment.
Self-employed Canadians should save a minimum of 10% for a down payment on a home. Ultimately, it will be up to the lender to decide the minimum down payment they’ll agree to go with. For some lenders, 20% may not even be enough.
Get up to date on your taxes
If you owe money to the CRA, forget getting a mortgage.
Any money you owe to the government – be it your personal income tax, corporate tax or your GST/HST payments – is your first and foremost debt, outweighing all others. The banks know that they’re second in line on the bad-debt food chain, and the CRA will be the first to get all of what they’re owed, even if you go bankrupt.
If your lenders get any idea that you’ve fallen behind on your taxes, it could spell big trouble for your mortgage application. Make sure all of your tax accounts are consistently up to date, and preferably have a few years of proof that you’ve made all your tax payments on time.
Use a mortgage broker and get pre-approved
Being self-employed introduces a lot of uncertainty to the mortgage application process. Every lender has their own criteria for self-employed people. They could have different rules about how you earn your income, how much you need to make to qualify, and what proof of income they need (of past performance and future contracts, too). They’ll have different mortgage rates, too, and not every lender will be favourable to the self-employed.
Self-employment is a situation where a mortgage broker is vitally important. Mortgage brokers negotiate with lenders on your behalf, and they’re experts when it comes to mortgages. They’ll be able to walk you through the process of verifying your income, and help you find the right lender for your needs. And, mortgage brokers have access to the best mortgage rates in Ontario (and best mortgage rates in Canada, for that matter), so you know that you’ll be getting the best deal on your mortgage.
A mortgage broker can also help you get a mortgage pre-approval. This is a letter from a lender saying that you’re approved for a mortgage, and specifying the amount you’ll be able to borrow. Pre-approvals are usually good for up to 120 days, giving you lots of time to look for a home with confidence that you’ll be able to get the mortgage you expect.
Put your hustling skills to work
Self-employed people are some of the hardest working, scrappiest (in a good way), resourceful people out there. People who run their own businesses take huge risks every day, fight for their share, and do whatever it takes to make their business succeed.
If you’re self-employed, you know better than anyone whether you can afford a mortgage. And even with all the extra obstacles in the way, you’ll be better suited than anyone else to handle them, too.
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