Ever since the financial crisis of 2008, it’s been tougher and tougher to qualify for a mortgage in Canada. With the maximum amortization period now capped at 25 years, and housing prices reaching unaffordable levels in various parts of the country, many first-time homebuyers are having to sit on the sidelines and save more before they can get into the market.
At a time when more Canadians are turning to self-employment on either a full-time or part-time basis, as a way to boost a struggling job market, they also need to be able to prove how much they make and whether or not that is a sustainable amount of income. Today, we’re going to look at what it takes for someone who is self-employed to qualify for a mortgage.
Proving Your Income
Self-employment can be a double-edged sword. On the one hand, you can enjoy the flexibility of working for yourself, setting your own rates, etc. On the other hand, proving your income becomes that much more difficult – especially when you’re talking to the banks. Salaried employees applying for a mortgage can prove their income through T4 slips and a few recent paystubs. For the self-employed, it isn’t that simple.
Whether you’re a small business owner or a freelancer, the fact that you won’t have any T4 slips to prove your income means your lender must qualify you on the next best thing: your stated income. Stated income is how much you claim to earn and, for the lenders sake, you’ll need to back it up with proof. When applying for a mortgage, you should be ready to supply any number of the following documents:
- Your income tax returns and notices of assessment for the previous two-to-three years
- Financial statements for your business
- Proof that your HST and/or GST is paid in full
- Contracts showing expected revenue for the coming years
- Your personal and business credit scores
Your Debt Service Ratios
On top of being able to prove your stated income, your lender will look at your numbers and qualify you for a mortgage based on two ratios: your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio. This is where it becomes important to get your financial house in order, before you even consider getting pre-approved for a mortgage.
Your debt service ratios calculate two things: how much you can afford to pay monthly to own a home, and then how much you can afford + how much debt you must repay each month. For self-employed individuals, it may be even more important to have less debt than someone who is salaried, so you have an easier time qualifying. It’s also a good idea to review your credit report before talking to any lenders, in case there are any mistakes that need to be cleared up.
Your Back-up Plan
Finally, if your lender seems reluctant to qualify you for a mortgage, there are a few other options that can help self-employed individuals seal the deal. First, you could wait and save more, to increase the size of your down payment. You could also prove ownership of any assets you hold. And the least favourable option for most buyers, but one that works, is that you could get a co-signer with steady, salaried employment to apply for a mortgage with you.
While it can be more difficult for self-employed individuals to qualify for a mortgage, there are some lenders who have more flexible qualification requirements than others. For example, some lenders may require more proof of stated income than others. And some lenders may be willing to overlook your stated income in return for a much larger down payment (30% or more). If you’re self-employed, the important thing to remember is to keep all of your financial records, work contracts, etc. in order, should you need to present any of them during your pre-approval process.