With mortgage rates continuing to stay near ultra-low levels, it's no surprise that many Canadians are clamoring to invest in a home purchase or refinance their current home loan. However, the process can be slightly more difficult for one of Canada's growing demographics: The self-employed.
The latest statistics from Industry Canada show that the country has 2.67 million self-employed individuals, which represent nearly 15.4 percent of all the employed workers in the country's economy. In fact, the number of self-employed Canadians has risen steadily over the last 10 years, especially amongst women.
"Over the past decade, the number of self-employed workers increased by 17 percent, while the growth rate of the overall labour force was 15 percent," reads an excerpt from Industry Canada's official website. "Slightly more than one-third of self-employed workers were female – the share of female self-employment rose steadily from 1976 to 1998, from 26 percent to 36 percent, and has remained at around 35 percent since 1999."
While self-employment can offer individuals the price and flexibility of being their own boss, it can also present problems when it comes to obtaining home loans.
Most mortgage applications ask a borrower to state their income, proving how much money they bring in with paystubs and similar paperwork . However, the self-employed must rely on tax returns to prove their income. Unfortunately, since many self-employed individuals report expenses on their taxes in an attempt to reduce the amount of taxes they must pay, it can make a business-owner's income appear low. While lower income can result in tax breaks, it makes it harder to qualify for a mortgage.
Additionally, the self-employed are often seen as less reliable than regular employees, since their income can fluctuate based on how their business is doing.
Ways to improve loan chances
While income may present a hurdle, self-employed borrowers who show they're financially stable will find it much easier to obtain financing for a home purchase. One way to do this is to outline all financial assets, such as investments and savings.
Another smart option is for self-employed borrowers to give extra attention to their credit scores. While good credit is an integral part of the loan process for all borrowers, it can be even more helpful for the self-employed. Business owners who have made smart financial decisions when it comes to their credit, like varying the types of credit they have and paying bills on time, will be in a better position.
A low debt-to-income ratio is also extra important for the self-employed. The fewer financial obligations a borrower has to worry about, the more likely they'll be to stay current on their mortgage.
Choosing the right mortgage type
Obtaining the right type of home loan can also make a big difference for self-employed borrowers. For instance, a low documentation mortgage can help borrowers buy a new home or refinance an existing property for up to 80 percent of its appraised value. This type of loan doesn't have the same income requirements as others, allowing lenders to base their approval on credit rather than net income.
This unique mortgage is available to self-employed borrowers with clean credit histories and proof of self-employment for three years who are purchasing a home located in or near a major center.