Becoming a homeowner in Canada, especially for first-time buyers, can be a challenging process. However, for self-employed individuals, the difficulties can be much bigger. Being self-employed comes with its own unique set of challenges. Unlike traditional employees, who can verify their income for mortgages, self-employed individuals must demonstrate financial stability through other means. This includes detailed tax records, business statements, and a history of consistent income. Fortunately, lenders and mortgage programs across the country are increasingly recognizing the growing number of freelancers and self-employed individuals. Let’s examine how self-employed individuals can work towards achieving homeownership in Canada.
Canada’s Self-Employed And The Roadblocks To Securing A Mortgage
Steve Garganis is the lead mortgage planner at Mortgage Architects and the founder of CanadaMortgageNews.ca. Garganis dives into the world of mortgage rates and the Canadian housing market. Recently, he discussed the challenges faced by self-employed individuals and freelancers when it comes to purchasing a home.
Garganis believes that for too long, Canada’s self-employed have faced a “maddening paradox.” He states that the financial strategies that demonstrate business savvy, such as maximizing deductions to lower taxable income, often become the most significant roadblocks when it comes to self-employed homeownership. Every week, Gargnis states he sees the same scenario play out as a mortgage broker. Brilliant entrepreneurs, skilled contractors, and creative freelancers can build thriving businesses and achieve excellent cash flow. However, they get turned away by traditional lenders who fixate on a single line on a tax return. This results in the same issue: A business has an excellent year, but the bank says they don’t make enough money.
Gargnis stated that if this sounds familiar, take heart. The landscape has changed, and lenders are now recognizing the unique financial reality of the self-employed. A new generation of intelligent mortgage products has arrived. These are designed to look beyond your declared income and see the true financial strength of your business. According to Gargnis, “the T4 slip is no longer the only golden ticket to homeownership for the self-employed.”
The Power Of Alternative Income
The most significant development for self-employed Canadians is the new acceptance of “stated income” or “alternative documentation.” More specifically, the acceptance of mortgage programs. According to Gargnis, this isn’t a loophole, but a common-sense approach. This is because these programs enable you to present a comprehensive and realistic representation of your earnings. This is especially useful when your tax returns don’t tell the whole story.
This shift isn’t specific to a single provider, but an industry-wide recognition of the modern workforce. All three of Canada’s mortgage default insurers now offer specialized programs for self-employed individuals. Let’s take a look:
- CMHC, or the Canada Mortgage Corporation, now offers flexible solutions that consider business tenure as well as credit history to support a more comprehensive income review.
- Sagen’s “Business For Self (Alt.A)” program is specifically designed to assess an applicant’s financial health beyond just their tax filings.
- Canada Guaranty’s “Low Doc Advantage” program also focuses on validating income through alternative means for those who are self-employed. This includes bank statements and financial reports.
Supporting Your Income Via Documents
With this modern approach being implemented, it allows self-employed individuals to build a case to support their stated income with documents that can actually prove the health of their business. These documents include:
- Bank statements for your business that show a consistent cash flow.
- Signed contracts and invoices.
- Corporate financial statements.
Though these changes are small, they are still important. The actual revenue your business generates will finally get the recognition it deserves. However, it is essential to note that to qualify for programs like these, your fundamentals must be reliable. Let’s take a look at what you should have to qualify:
- A solid down payment: Depending on the size of the mortgage, you’ll typically need a minimum of 10% down. This represents a significant difference from the 20-35% down payments that were often required in the past.
- A good track record: Lenders want to see at least two years of successful self-employment. This will generally be validated through your business licence, articles of incorporation, or GST/HST registration.
- A good credit score: A strong credit score, usually 680 or higher, is non-negotiable. This serves as solid evidence of your financial discipline and reliability.
Mortgage Success When Self-Employed
Are you self-employed and dreaming of owning a home? If this is the case, a strategic approach is key. Let’s take a look at the steps to prepare for mortgage success.
- Become a good record-keeper: Keep at least two full years of financial documents, and make sure they are organized! This includes T1 Generals (with the full Statement of Business Activities). Notices of Assessment, as well as any financial statements, should also be incorporated. Please make sure your taxes are filed and paid on time, as lenders view this as a sign of a responsible business owner.
- Separate business from personal: This is crucial! Please make sure you have a dedicated, separate bank account for your business only. This will create a clean, auditable trail of both revenue and expenses. This results in it being easier to demonstrate your cash flow. As an underwriter, seeing two funds together is a major red flag.
- Protect your credit score: Your credit history is a massive indicator of financial responsibility. Ensure that you regularly pay suppliers, credit card bills, and any other debts on time. Try to avoid large, unexplained cash withdrawals, as lenders may view this as an undisclosed debt.
- Work with a specialist: If you can, try to partner with a specialist. The mortgage market for the self-employed can be complex. Luckily, a mortgage broker who specializes in these applications knows which lenders are looking for self-employed files. More importantly, they can help you package your story well and set you up for success.
Self-Employed Home Ownership: Conclusion
Being self-employed should be an adventure to financial freedom, not a barrier. With more intelligent and flexible lending options for self-employed people, your dreams of owning a home are much more achievable. As long as you are prepared and organized, you should have no trouble at all.
Remember, if you are in the market for a new home, home insurance is critical! Don’t hesitate to contact isure for all of your insurance needs. Contact us or request a quote today!
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