Mortgages in Canada: Tips for the Self-Employed Home Buyer
In order to qualify for a mortgage, Canadians have to prove they have the steady income to cover their monthly payments. It’s a bit harder for self-employed people to make this happen.
Generally, traditionally employed home buyers are required to simply provide a pay stub and a job letter. Self-employed people may be required to show at least two years’ worth of tax filings, or they may be asked by the lender to prove income in other ways.
Sure, it might be a little harder to get a mortgage as a self-employed person, but it’s far from impossible. If you follow our tips, it will be easier to prove that you’re creditworthy.
Focus on Your Credit
You know that your credit score plays an important role in whether or not you can qualify for a loan, so it’s smart to give your credit score a boost. A lender feels comfortable lending to a salaried employee with mediocre credit because they can verify that the person has a steady income. As a self-employed person, you don’t have that luxury. However, having an excellent credit score can help compensate for the ups and downs you might have in your income. It’s proof that you’re able to consistently make your payments on time.
Order a free copy of your credit report, then check it for mistakes. You can then work to improve your score. There are lots of ways to do this, but the primary one should be by paying off debt. Typically a credit score is largely affected if a credit balance is above 50% of its limit, so if that’s the case with your own finances that’s a perfect place to start. You should also be sure to pay off all your bills on time, no matter what they are. Even phone bills count towards your credit score!
Once your debts are paid, keep your credit accounts active. Paying off your debts and closing your accounts might seem like a sensible idea, but if there’s no credit to report on, your credit scores might not change. It’s also worth noting that a free credit report might not have access to all the information that your lender does, and so they often return a slightly higher score. Aiming a little bit above where you want to be can’t hurt, and will usually mitigate this issue.
Keep Good Tax Records
The lender will want to see tax returns from at least the past two years, and if your business is incorporated you’ll also need to bring at least two years’ worth of financial statements. You’ll want to have those forms on hand so that you don’t slow down the process. If you own a business where significant deductions reduce your earnings on paper, the tax returns will help you show that you really do earn enough money to pay your mortgage.
Wait Until You’re Established
Lenders want to see some consistency. They know that being self-employed can mean that you have some months that are slower than others, and they need to see that you can weather those storms. This means that they want to see that you’re established in your career, even if you’re self-employed. If you’ve only started your own business a month ago, they’re going to see you as a risky prospect.
The one possible exception to this rule might be if you were venturing out in a field that you’d previously been employed in. For instance, if you’re a lawyer or an accountant who’s been working for 10+ years for a company, and you’ve recently branched out on your own, the lender might give you a bit more leeway. That’s dependent on the lender’s policies, though.
Build Up Your Savings
Another way that you can increase your chances of getting a mortgage is to have a significant amount of savings. For instance, if you’re able to put a 20 percent down payment on the home, lenders will be more willing to work with you. In addition to your down payment, if you had enough money in your emergency fund to cover a year’s worth of mortgage payments, this can also ease any anxiety the lender might have for you. During the time it takes to save up this money, you’re also building up your credit reputation, so it’s a win-win.
Qualify Based on Your Spouse’s Income
If your spouse earns a paycheque the traditional way, this can increase your chances of getting a mortgage. You may even be able to qualify on one salary alone. Not including your income from self-employment can significantly reduce the amount of money that you qualify for, so this may not be a viable option. However, self-employed people who only earn a part-time income may want to consider going this route because it reduces some of the hassle. Talk to a mortgage professional about whether this might be an option for you.
Start Planning Early
Applying for a mortgage as a self-employed person can take slightly longer, but it should also be clear that you may need to take some special steps long before actually applying for a mortgage. Building up a large savings account and improving your credit score takes time, and you need to have some patience. Focusing on these things, though, can really improve your chances.
More and more Canadians are earning their income through self-employment. While applying for a mortgage can be a little trickier, you can definitely still qualify. Each person’s financial situation is different, though, so don’t be afraid to ask your mortgage professional what you need to do to qualify for the mortgage you want.