Self-employed? 4 Strategies to help you qualify for that loan

Self-employed? 4 Strategies to help you qualify for that loan

Self-employment is a dream come true for many Canadians. Better financial prospects and more control over work-life balance are frequently cited benefits from those who are self-employed. However, as with most things in life, self-employment does have its downsides. Loans and, more specifically,  home mortgages can be much harder to qualify for those in a self-employed situation. Unfortunately, self-employment is considered a riskier endeavor than regular employment by most mortgage lenders, and thus lenders have created some very real speed bumps in obtaining a mortgage for the self-employeds. With that said, it is still very possible for self-employed individuals in Canada to qualify for a mortgage, if they’re diligent and intentional in their planning and preparation. Here are our best tips!

Give yourself lead time. Two years, to be exact. If you’re newly self-employed, plan on allowing at least two years to show consistency of income level. Unfortunately, it doesn’t matter if you were previously employed and earning hundreds of thousands a year. Unless you can produce that amount consistently for two years running as a self-employed individual, you won’t qualify on that amount of income. Lenders will look specifically at line 150 on your tax return and average that figure for the past couple of years to project your income level and determine what they believe you can afford.

Be diligent in your record-keeping. If you’re one of those people who keeps business receipts in a shoebox under your bed, only to pull it out once a year at tax time, now is the time to create a better process! Mortgage lenders require an enormous amount of documentation from self-employed mortgage seekers, such as tax returns, financial statements and bank statements, and they often need to see it for several years running. Applying for a mortgage as a self-employed individual is definitely an instance of “more is more”. Without a doubt, the more documentation, the better your chances of qualifying for that mortgage. Another bonus? The more concretely you can prove your income, the better the chance that you’ll qualify for mortgage insurance (if your down payment is going to be less than 80%).  

Be modest with your business expenses. In the time period leading up to when you apply for a mortgage, err on the conservative side with your business expenses. While you certainly don’t want to overpay in taxes, you also don’t want to unnecessarily diminish your reported income.  So, maybe avoid writing off that lunch with your friends-slash-clients, or purchasing that expensive ergonomic office chair, at least until you complete that home purchase!

Get professional help. Given the complexities of seeking a self-employed mortgage, you’ll benefit tremendously by engaging a mortgage broker to work on your behalf. Mortgage brokers know which lenders are the easiest to work with for self-employed people and will save you time identifying your best options. A mortgage broker also serves as a project manager in your search for a mortgage, helping to keep you organized and on task. They can anticipate potential hiccups and make the entire process much less stressful. 

While securing a mortgage as a self-employed person is indeed more complicated, professional guidance and proper planning will ensure that you’re successful when the time comes to purchase that new home!