Being an entrepreneur comes with an assortment of perks, from ditching long commutes in favour of home offices, to Skyping meetings from your beach vacation locale. In a lot of ways, working for yourself can seem like you've won the lottery.
While being self-employed has many benefits, working for yourself can also mean struggling when it comes to securing a mortgage due to increased debt-to-income ratios `and stricter mortgage regulations.
Are Tax Deductions Hurting Your Ability to Buy A Home?
If you're self-employed, then you know all to well that running a business can be very expensive, in addition to being a significant tax burden. And if you're like many Canadian entrepreneurs, you take full advantage of tax deductions. Deductions for things like home office depreciation, operational equipment, education can reduce the amount of taxes you have to pay - but they can also reduce your net income, creating an incomplete financial picture.
When it comes to income evaluation, entrepreneurs and other self-employed professionals are often evaluated differently compared to traditional salaried workers. Self-employed applicants have to report net income, whereas lenders assess salaried workers on their gross annual income.
The most crucial factor for every self-employed mortgage applicant is their debt-to-income ratio. Lenders will typically look at two to three of your most recent tax returns comparing expenses to the borrower's income. Generally speaking, self-employed Canadians will need a debt-to-income ratio below 40 percent. However, different lenders may have varying requirements, making it a good idea to compare mortgage lenders.
You can also benefit from working with a lender who has experience underwriting mortgages for Canadians who are self-employed.
Self-Employed Lower Credit Scores
Self-employed Canadians often have lower credit scores than those who work in traditional salaried jobs. Because lenders look at our credit scores when considering applicants, if you do get approved, your lower credit score could mean a higher mortgage rate.
To make it easier on your application, check your credit score before applying for mortgage preapproval. A little time spent cleaning up minor errors on your report can make it easier for you to qualify.
Ways to Think Creatively About Your Mortgage
To set yourself in the best possible position to get a mortgage, begin with an honest evaluation of the size and type of home you really need.
Proving Your Income
When you're self-employed, a T4 or a payslip isn't an option. So you'll need to supply different methods of proving your income. Three years of tax assessments, income statements, balance sheets or retained earnings are all different ways to help demonstrate your income.
Townhomes and semi-detached homes tend to have lower price tags, requiring a more modest down payment and a smaller mortgage, which are often easier to obtain.
Co-owners or Cosigners
Having two names on a mortgage application can make it look more attractive to potential lenders. Some Canadian entrepreneurs are buying homes (think duplexes) together to improve their mortgage approval odds. Additionally, a second name on the application as a cosigner can move you into the approved column.
Getting a mortgage as if you're self-employed can be a challenge, but it isn't impossible. In many ways, it's similar to running your business: do your research, and be flexible. When you're prepared for the task ahead, you're halfway to achieving your goal.
And as always, it pays to shop around online for the best self-employed mortgage rates.