DO SELF-EMPLOYED INDIVIDUALS HAVE TO PAY HIGHER MORTGAGE INTEREST RATES?
2017-02-06 | 15:32:26
Are you self-employed and finding it difficult to arrange competitively-priced mortgage financing for your home & other properties? Or are you worried that the process will be too complex and time consuming?
There are great advantages to being one of the country’s 2.75 million self-employed, a group that according to Statistics Canada has a higher median net worth than paid employees. Unfortunately the benefits of self-employment especially in light of recent tightening in the mortgage market, has brought more scrutiny to the process and requires more diligence when applying.
The primary reason for this is that income is not always the easiest to prove for the self-employed. Income is often significantly reduced on paper, since many are motivated to take advantage of as many tax write-off’s as legally possible in order to minimize taxes and position themselves in as low a tax bracket as possible.
So what can you as a self-employed person do to improve the chances of qualifying for a mortgage with terms that work for you? The most important thing is to be prepared and plan as far in advance as possible. Lenders want self-employed applicants to meet certain criteria, and to do this lenders will need to see a number of documents.
Complete legal, financial and tax documentation is very important to mortgage application success:
- Notice of Assessment (NOA) from Canada Revenue Agency (CRA) for two years;
- Your T1 General Income Tax filings for two year;
- Proof of business ownership – business or GST Licenses, and/or article of incorporation; and
- Proof you are up-to-date with Income Tax, HST and/or GST payments.
Other documentation that lenders may want to see includes:
- Financial statements;
- Business invoices and contracts;
- Bank statements showing account receivable payments going into your bank account; and
- RRSP or pension LIF/RIF/LIRA asset statements.
In addition to providing information that documents your situation and provides a lender with insight as to what your realistic income level will be over time, there are a number of suggested strategies that can help depending on your specific circumstance – helping you plan ahead for when you’re ready to move forward with an application:
Writing off fewer expenses in the two years leading up to submitting an application will help. Yes, this could mean you’ll have to pay more personal taxes – however since your income will be higher this will help with the qualifying process.
Involve a certified accountant. Lenders often prefer to see self-employed income submitted through a professional. The truth is that the time you spend doing your own taxes will not be as efficient both financially and time-wise as a certified accountant who knows what to look for and has experience understanding the tax laws and their implications.
Choose your timing carefully. If you are leaving on an extended holiday or sabbatical within the two years prior to purchasing or refinancing a mortgage, your two-year average income may be lower. Plan your timeline with income in mind so that you can take the time off that’s needed.
Ask a Mortgage Broker about stated income as an alternative. Some lenders will approve mortgages based on stated income – for self-employed who are unable to provide traditional income verification but have a proven 2-year history of managing their credit and finances responsibly.
Bankruptcy. Although some business people see bankruptcy as a viable option to get out of a bad situation, lenders generally don’t like bankruptcies. However some lenders will overlook them if there’s been consistent and excellent credit history since the bankruptcy and you’ve been fully discharged from it for a specific period of time. Have all your bankruptcy and discharge papers available because a potential lender will want to see them.
Offer a larger down payment. Lenders are somewhat handcuffed when there is less than 20% down on a property purchase. But if you offer more than 20%, depending on the lender, their flexibility might increase if they want you as a client.
Be prepared for a higher costs of borrowing if necessary – not everyone can qualify for the best rates. Lenders offer discounted rates to those that meet their preferred profile however those that are not conventional are seen as a higher risk, and therefore only eligible for higher interest rates. Also it’s not unusual for lender and/or broker fees to be involved.
As a last resort, you can do private financing. Even though it’s an expensive option, it could result in the mortgage you are looking for. Rates are high and there will be lender/brokerage fees. However, you could be in a private mortgage for 12 months or less, whereby giving yourself time to improve your credit or income situation. The whole point of private financing is to use it as a short term solution as part of a long term financial strategy and plan.
The more information you have available and the more prepared you are, both short and long term, the better the chances are you’ll qualify for the mortgage you want – and give yourself access to the same mortgage products and rates employed borrowers often enjoy.