Posted by John Doe
For many Canadians, self-employment is a necessity in the current economic climate, with people taking on consulting or freelance roles to earn a decent income. If you are self-employed and looking to purchase a home, finding the right mortgage can prove challenging. However, there are steps you can take to secure a mortgage when you work for yourself.
Check on your credit.
Before you are ready to apply for a mortgage ask yourself this: How is my credit? When you started your business did you take out a loan that you’re now having trouble paying back? Are you struggling to pay off revolving credit (credit cards) or barely making a dent in your student loans? Have you missed any payments on your car loan or utility bills? Starting your own business costs money and sometimes it can take years to break even let alone turn a profit. Make sure your credit is above par before you think about getting a mortgage when you’re self-employed. Lenders want to see that you will be able to pay back your mortgage without missing payments.
If your credit score is decent (680 and higher), you should be fine to get a mortgage even though you’re self-employed. With a lower score you could be deemed a high-risk borrower and have trouble securing a mortgage. If your credit is low you can repair it by paying all your bills on time and in full. Also, do not take out any new loans or apply for additional credit cards while you are in the process of fixing your credit.
Work with a mortgage broker.
The most important way to secure funding for your mortgage when you are self-employed is to work with a mortgage broker. Do not rely on your bank or another financial institution because although they may have mortgage packages geared towards those who are self-employed, the rates may not be ideal.
When you work with a mortgage broker, you are working with a mortgage professional with access to multiple lenders. Mortgage brokers are able to navigate the waters for you whether you’re self-employed or employee of the month at at Fortune 500 company. The broker’s job is to ensure that you get the mortgage package that best suits your financial situation, and if you’re self-employed that situation may fluctuate from month to month depending on the kind of work you’re in and your clientele.
What paperwork do you need to get a mortgage when you’re self-employed?
As with any type of mortgage, you will need to provide certain paperwork. For a self-employed individual to get a mortgage they will need the following documentation:
- Financial statements: These show how much you’ve made since you’ve started your business.
- Proof stating that your HST and/or GST are fully paid: This shows that you are capable of paying your taxes in full and on time.
- Outlines of expected revenue over the next five years: Not all lenders require a five-year timeline for expected earnings but that’s generally the rule.
- Your personal credit score and your business’ credit score.
- Documentation proving that you are the principal business owner.
- Your business or GST licence or Article of Incorporation: Please only provide a copy of these items.
- Notice of tax assessments: These should be provided for the previous two or three years.
- Proof that the down payment for your home is not a gift: If you were gifted the down payment by a relative or friend you can still get a mortgage. You will just need them to provide a document that says they gave you the funds for your down payment and that these funds do not need to be paid back.
Things to consider when buying a home when you are self-employed.
- Watch your expenditures
You will need to prove your income and be careful of what you expense. Proving your income may be the easiest thing to do when shopping for a mortgage when you’re self-employed. You may already work with a bookkeeper or accountant who is helping you keep track of your earnings and expenditures making it easy to show your income. Furthermore, many self-employed individuals expense as much as they can to minimize what they’ll owe in taxes. The amount you’re allowed to borrow for your mortgage may be affected by how much you’re expensing each year. Watch what you’re expensing and try not to be frivolous.
- Remember the other costs
There are many costs associated with purchasing a home that go beyond the down payment. For example, there is mortgage insurance if you do not put 20% down. There are also closing costs, possible land transfer tax (depending on where you live), lawyers fees, home inspection fees and moving costs that go hand-in-hand with homeownership. If you are self-employed you may have a harder time budgeting for these associated expenses, especially if you freelance or take on consultant work that isn’t steady.
If you’re still unsure of how to get a mortgage when you’re self-employed, contact a broker. Mortgage brokers have access to a myriad of lenders some of which specialize in self-employed mortgages. Thus, you have a great chance of securing funding for your new home.