How To Get a Mortgage When You’re Self-Employed

Despite the coronavirus pandemic leading to a so-called Great Resignation that has produced a labour shortage in North America and Europe, fewer Canadians are embracing entrepreneurship, bucking the growing trend south of the border. Before the global health crisis, there were close to 2.9 million self-employed Canadians. Today, Statistics Canada data show a little more than 2.6 million self-employed folks, with losses situated throughout multiple industries, including professional and technical services. It turns out that these folks have transitioned to paid full-time employment. It is a grind for the rest of the self-employed class, but it is also liberating. Of course, that feeling may not be the same when it comes to gathering credit and applying for loans, including a mortgage. If you’re among the “in business for yourself” crows, you may be wondering how to get a mortgage when you’re self-employed.

One of the challenges of being an entrepreneur or even an independent contractor is that the major financial institutions and big lenders will be more apprehensive about extending credit to Canadians who work for themselves.

When it comes to applying for a mortgage, especially in this red-hot Canadian real estate market, it can be a difficult feat to achieve. But is it impossible? Not quite if you employ the right strategies.

How To Get a Mortgage When You’re Self Employed

You can take advantage of these seven tips to increase the odds of qualifying for a mortgage when you are self-employed.

#1 Provide Self-Employment Record

How long have you been self-employed?

Let’s be honest: If it has been fewer than a couple of years, it will be a bit hard to prove to a mortgage lender that you possess a stable income and can, therefore, make regular payments. However, if you have been self-employed for more than two years, your track record will spotlight that you can earn a steady income, afford to complete mortgage payments, and pass a mortgage stress test.

#2 Offer Income Tax Assessments

One of the best documents you can provide to the bank is your income tax assessment from the Canada Revenue Agency (CRA) for the last few years. This will confirm how much you have earned, essentially verifying to the mortgage specialist that you make enough money to maintain a $500,000 home loan.

#3 Be Ready for More Documentation

Yes, by now, you must be asking yourself, “More documentation?” But in this environment, you must have as many documents proving yourself as possible to better the odds of approval.

So, what type of documents should you have anyway? Here are a few options at your disposal:

• Bank statements.
• A list of assets (savings and investments).
• A list of debts and monthly payments.
• Other sources of income.
• Proof of employment status (business licenses, client referrals, and letters of reference).

#4 Eliminate Your Debt

It is indeed hard not to face a mountain of debt in the post-crisis world.

The coronavirus pandemic shut down the economy. Inflation is at its highest level in about three decades, and the cost of housing is through the roof. Interest rates are beginning to rise as the Bank of Canada (BoC) tightens monetary policy. Ultimately, the cost of living is going up without any respite in sight.

But when you are self-employed, you can face greater scrutiny during the mortgage approval process. One tactic to enhance your odds is eliminating your personal debts, from an automobile loan to a high-interest credit card to student loans. While this can be a tough hurdle to overcome, it is doable with some financial discipline and fiscal responsibility.

#5 Enhance Your Credit Score

The higher the credit score, the more likely a mortgage lender will consider you creditworthy. In Canada, a good credit score is in the range of 660 and 724, according to Equifax. An exceptional credit score is anything above 760.

Do you want to give your credit score a bump? Here are a few measures you can employ immediately:

• Pay all of your bills, whether a credit card or utilities, on time.
• Do not cancel your credit cards.
• Maintain a broad array of credit sources (loans, lines of credit, and credit cards).
• Inspect your credit report and resolve any inaccuracies.
• Pay off old debts.
• Be wise when using your credit (do not be lavish and wasteful).

#6 Build a Hefty Down Payment

In Canada, the minimum down payment for a home less than $500,000 is five percent. If the residential property is more than $500,000, the minimum down payment is five percent for the first $500,000 and then ten percent for the remaining sum.

With Canadian housing prices only going higher, this can be hard to accumulate. That said, if you have the means, you need to build a hefty down payment when applying for a mortgage. And, of course, do not use all of your savings and investments for the down payment. Lenders will want you to have a rainy-day fund throughout the term of your mortgage.

#7 Maintain Vast Cash Reserves

Speaking of rainy-day fund…

In addition to having the necessary down payment and income level to secure a mortgage, you must also possess plenty of cash reserves in the event of a job loss or illness. This will ensure that you can afford the monthly mortgage payments throughout any unforeseen circumstance in your life.

It is Not Impossible

Nobody will argue that it can be more challenging for a self-employed person to get approved for a mortgage than a full-time, permanently employed individual. That said, under the right conditions and with the right lender, you can undoubtedly get approved for a 25-year mortgage.

Originally published on the RE/MAX Canada Blog.