Mortgage Buying Rules for the Self-Employed and Entrepreneurs
Did you know that over 16% of all working Canadians are self-employed or have entrepreneurial styled businesses?
These hardworking folk also need real estate financing to buy a home but the new B20 (Underwriting Guidelines for Residential Mortgages) have made this more of a challenge.
Knowing what to expect and getting prepared is your best strategy to overcome any hurdles that have to be tackled beforehand.
What’s Changed for the Self-Employed and Entrepreneurs?
The challenge with the self-employed is that that they don’t have a traditional salary. They use instead what is called their “stated income” which is the amount the borrower claims they have earned as income. Lenders would generally assess the ability of the self-employed to repay the loan based upon:
- Credit rating
- Size of the down-payment
- Debt repayment history
- The cash flow of the business
The new regulations which came into effect have resulted in traditional lenders such as banks taking a more cautious approach for mortgage applications. Lenders are performing more due diligence to examine the income statements and tax returns of self employed applicants.
What Do Mortgage Lenders Want from the Self-Employed and Entrepreneurs?
Many lenders will examine your income as it relates to the average income earned for your particular industry or field. They will also examine your income relative to the type of business you run and to the amount of time you have been operating your business.
Another key area that is receiving closer scrutiny by lenders is the amount that is being written off of your income tax submissions. The purpose is to get a clearer understanding of your stated income versus how much you are reporting as income to Revenue Canada.
Mortgage Application Preparation Tips for the Self-Employed and Entrepreneurs
Although getting approved for a mortgage is more of a challenge for the self-employed and entrepreneurs, you can make the application much less painless by preparing your paperwork beforehand.
Some tips to keep in mind include:
Pay down your Debt
One of the key factors of getting a mortgage approved is known as “debt-service ratio.” Credit cards may be convenient, but too much credit dependence is a red flag for lenders. This refers to how much of your income is used to cover your debts including what you would pay for the mortgage, heating and property taxes.
Most lenders don’t want to see it much greater than around 32%. Lenders will check your credit history and credit rating so you should do this in advance to understand where you stand. This applies to both your personal credit and your business credit history and standing.
Most lenders would like to see 3 years worth of your financial statements. This especially includes your income tax returns as lenders want to know how much tax you owe and how much you’ve written off on your returns.
You will also need to gather up your business license, articles of incorporation and your business financial statements. To show that you have a steady source of income, your client contracts and work orders will also demonstrate proof of your income and cash flow.
You should also be prepared to show that your GST/HST payments are all current as well.
The more information the lender knows about your business assets, the more comfortable they will be in approving your application.
How to Improve your Chances of Getting Approved
Several tactics you can use to bolster the strength of your mortgage application is to consider the following approaches:
- Increase the amount of your down payment
- Have an available co-signer
Lenders feel they are taking more of a risk when it comes to the self-employed and entrepreneurs. You may be eligible for low rates but should be prepared to pay more for higher rates. Also, don’t forget about mortgage insurance as well.
When it comes to real estate financing you can increase your chances of success by working with a Vancouver mortgage broker like me. We can help you prepare the paperwork and have access to broad range of lenders to increase your chances for approval.