Plenty of Canadians aspire to be self-employed, and for many, the possibility seems like just a dream. Other than having the freedom to set your own business rules, policies and net all the truly deserved profit, self-employed people can set their own hours and even work in their pajamas if they want. What really could be better than that?
Recent statistics show that at least 20 percent of all income-earning Canadians are self-employed, but the numbers are growing all the time. When economic strain and corporate pressure frustrate or deter a person from working in a traditional work position, self-employment may be just the ticket in reviving his or her happiness. But what could it do for that person's ability in obtaining a mortgage? After all, don't lenders look at employment history and stability when determining a person's eligibility on a mortgage application?
Of course they do. But a recent article in The Globe and Mail encourages Canadians to not feel frustrated when trying to buy a home or refinance a mortgage. Turns out that taking a few extra steps and getting all those ducks in a row – in the form of proper financial documentation and a down payment, of course – can give banks the proof they need that a person will be able to pay his or her mortgage on time, every time.
Why some banks have a problem with self-employment
It has nothing to do with the person in most cases. It's that self-employed Canadians aren't really guaranteed a paycheck and have no set income (in most cases). Because of this, the banks have to base their decision on stated income rather than verified income – a risk no matter how you look at it.
This stated income isn't just a number a self-employed worker pulls out of thin air; as a matter of fact, proper documentation, such as tax returns and financial statements, can work in the applicant's favor and prove that their stated income is exactly what they claim it to be. Some banks require business owners to have at least two years' worth of statements ready to back their claims.
“We would look at the situation and say, this is a strong business, it has strong assets that have been accumulated over the years, there’s a solid credit report with good repayment history and there’s cash flow within the business to repay the $400,000 principal residence loan,” Rick Arnds, senior manager of emerging markets at Meridian, said in the Globe and Mail article. “So we would probably give them the mortgage.”
See? It can definitely be done. It just takes a bit of extra work – not something that is likely to deter business owners and self-employed Canadians.
Required homework for self-employed borrowers
It shouldn't come as a surprise that not all mortgages are created equal, and the same goes for mortgages that many self-employed workers may be attracted to.
Low documentation mortgage – This may be used to buy property or refinance a current property up to 90 percent of its appraised value. The bank will approve this type of loan on credit rating instead of net income, though a spotless credit history and proof of at least three years of self-employment are required. The property's physical location may also be a factor.
No income mortgage – This may be used to buy a property or refinance a current property up to 75 percent of its appraised value. With this type of loan, credit history and current and previous income do not have to be spotless, though 25 percent down or 25 percent equity is required.