Being approved for a mortgage in Canada has never been the easiest thing if you’re self-employed and it’s become even more difficult since the 2008 financial crisis. The maximum amortization period in the country has now been limited to 30 years, and in some areas the housing prices are becoming quite expensive, like here in Toronto. This means many potential homeowners are now having to save their money in order to come up with a larger down payment.
In addition, many Canadians are now working for themselves on a part-time or full-time basis as business owners or independent contractors. This has become a popular move with many people since the internet more or less took over the world. We see thousands of residents working for themselves from home with internet-based jobs such as graphic design, writing, and retail sales etc. While being your own boss is an ideal situation for many people, you still have to be able to show lenders verifiable income before being approved for a mortgage.
Therefore, getting approved for a mortgage if you’re self-employed can often get a little complicated. Before anybody lends to a potential homebuyer, they need proof that the mortgage can be paid off. This means your income has to be high enough to make the mortgage, property tax, heating, and any other outstanding debt payments each month.
How to Prove Your Income
A salaried employee usually has no problem proving how much they make as they can simply produce a pay stub and a T4 tax slip. But things aren’t that easy when you run your own business and pay yourself. First off, you won’t have a T4 document to show a mortgage lender. However, you can still produce income tax returns as well as notice of assessments as a way to show how much you earn. You can also provide other types of financial statements relating to your business and prove that your taxes, including GST and/or HST, have been paid in their entirety. Your business and personal credit score can also be a big help, as can any contracts for future earnings and favourable debt servicing ratios.
The lending company or individual will carefully look over all the documents you provide and will calculate your GDS ratio (gross debt service) and TDS ratio (total debt service). You need to be sure these both fall in line with the lending guidelines before being approved for a mortgage. The TDS ratio will let the lender know what mortgage payment amount you’ll be able to afford per month combined with any monthly debt payments. The less debt outside the mortgage you’re applying for the better, and it’s no secret that the more provable income you have available to you the easier it is to qualify.
You should also get a copy of your credit report before applying for a mortgage to make sure it looks right and is error-free. If there are any mistakes in it, be sure to ask to have them rectified. It’s important to prove you can handle mortgage payments and homebuyers need to realize they could easily find themselves in financial difficulty in the near future should they obtain a mortgage they can’t really afford.
Have a Backup Plan
If you feel you can handle mortgage payments, but still get turned down, self-employed Canadians do have a couple of more options. The first is to wait a year or two and save money for a larger down payment, which means you won’t need to borrow as much for a mortgage. In addition, if you own any assets you could provide the lender with proof of ownership. The other option is to find somebody to co-sign or be a guarantor on the mortgage. An ideal candidate for this would be somebody with a well-paying salaried job with good credit.
It’s always a good idea to visit a mortgage broker as they will be able to track down the best options and deal for you. Some financial institutions outside of the major banks are more flexible when it comes to their qualification requirements, and tend to be more lenient when looking for proof of earnings, often allowing applicants stated-income qualification. Others require a down payment of at least 30 per cent.
The main thing for self-employed homebuyers to remember is to keep each and every one of your financial records and work-related documents and contracts as proof of employment, and to make sure that no income tax arrears are owed otherwise they will need to be paid prior to closing any mortgage transaction. For more information on getting approved for a mortgage if you are self-employed, please contact MortgageMeister.com today to speak to one of our mortgage professionals.