There are definitely advantages to being your own boss. You can choose your own hours, choose who you want to work with (or not), and take full control of how finances are used. But there are some downsides. One of the most notable is how difficult it can be for someone who is self-employed to qualify for a loan or a mortgage.
Banks and lenders are typically reluctant to loan money to those who are self-employed or work on a commission basis because they don’t receive printed T4s and they may get paid inconsistently – more or less – making it a bit harder to document income. While one month may be exceptionally busy, the next may be unpredictably slow.
Without a regular income, a bank or lender may deem you as a risk since they are unsure if you’ll be able to make your scheduled payments.
So what does an entrepreneur do when their business is thriving and they’re ready to buy a home? Check out these tips to improve your chances.
Keep your credit pristine
Maintaining a good, strong credit rating is even more important for the self-employed than most. If a previous venture failed and you were forced to declare bankruptcy, or you defaulted on business loans or credit accounts, a bank is less likely to lend you any money.
Before you apply for a mortgage, pay off as much of your outstanding debt as possible, and cancel any unnecessary credit cards to bump up your score. A good credit score serves as proof that you are reliable and prompt at repaying your debts. Not only will you have a better chance at getting approved, but you’ll likely get a better rate as well.
Fine tune your taxes
As an entrepreneur, you need to pay close attention to your taxes, no matter the business size, employee count, or income generated. Even if your business operates mainly on cash and you decide not to claim all of it, you could face hefty fines and penalties for tax avoidance, and thus, reduce your eligibility as a borrower.
When filing your taxes, speak with your accountant or financial advisor about how to legitimately minimize your tax burden, while maximizing your reported income.
Save a bigger nest egg
Be prepared to make a significant down payment. While some homebuyers can get away with putting down five to 10 percent, if you’re self-employed, banks may prefer you to put down more as it’s an indication that you are less of a risk. Putting down 15 to 20 percent may mean better rates and less restrictive terms.
Create a paper trail
As mentioned earlier, applying for a loan without regular paystubs or an employer-issued T4 can get tricky. Banks and lenders generally require a number of documents to seal the deal. If you’re self-employed, bankers may ask for:
- Your last three Notice of Assessments (received after you file your annual income tax return) to get a sense of your current average income. Small business owners often claim expenses, making their income on Line 150 appear a lot lower than it actually is, so you may want to ask your lender to look at the amount you bring in before such claims were made.
- A CRA Statement of Account showing that your GST/HST is paid up-to-date.
- Bank statements from your business account showing regular, significant deposits.
- Details of all your assets, including RRSPs, TFSAs, stocks, bonds, equity in business assets, etc.
- Other paperwork including incorporation or business registration papers. Make sure you have copies and that everything is up-to-date.
Look beyond the bank
As much as you may get along with the loan officer at your local bank branch, working with a mortgage broker is more likely to yield positive results if you’re self-employed. Whereas big banks may have general mortgage loan terms, mortgage brokers work around the customer’s unique situation and can tailor a loan suited to their needs. Mortgage brokers are trained to work with candidates of all kinds, including the self-employed, and they can help you find the best rate among a variety of alternative lenders in addition to the big banks. So if you have a complex financial situation, it may make more sense to work with a mortgage broker.
Though it may take a bit more work, it’s still completely possible to own a home without a T4. Mortgage lenders want to make sure you can make your monthly payments, no matter your field of business. So before popping into those open houses and getting your hopes up, it is essential to get your finances and paperwork in order to qualify for a mortgage.
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