If you are self-employed in Niagara, St. Catharines and the surrounding region, you are an important part of the 15% that currently make up Canada’s labour force.
While the advantages of self-employment are that you have independence, control and freedom from routine, it is also your responsibility to make sure you always have work to do. This means you may sometimes be without work and therefore without income. You also have fewer free benefits. You will have to pay for your own vacation time, fund your retirement plans, pay your own taxes and buy your own medical insurance.
Self-employed mortgages without traditional proof of income are a different animal from your cookie-cutter AAA bank mortgage.
While many prospective homeowners are driven to alternate lenders because of government-mandated stress tests and poor credit scores, the self-employed often have additional burdens to overcome in proving their income.
According to the Bank of Canada, private lenders have doubled their share of the mortgage market in Greater Toronto since 2015, accounting for eight per cent of mortgages in 2018. These lenders are less concerned about income and more focused on the property’s value in case they have to foreclose. The tradeoff is higher interest rates and fees.
Still, the option can be helpful for the self-employed who expense as much as they can in order to reduce their taxable income and who have a strategy to beef up their credit score with a goal of returning to a traditional lender. The downside is, the writeoffs make it harder for lenders to obtain the 35 to 44 per cent debt-to-income ratio sought by traditional lenders.
Proving a sufficient track record of income to qualify for a mortgage can be the biggest challenge for people who work for themselves. Due to current government regulations, lenders now want verifiable proof of true earnings while the stress test makes the hurdle even higher by requiring almost 20 per cent more provable income to qualify for the same mortgage available in 2017.
However, the Canada Mortgage and Housing Corp. is trying to ease the paperwork required to obtain mortgage loan insurance. It introduced changes last October that suggest additional factors lenders could consider if the borrower has been operating their business for less than two years, including having sufficient cash reserves, predictable earnings, acquisition of an established business and previous training and education. It is also encouraging acceptance of a broader ranger of documents, which mitigates any difficulty that they have in qualifying for a mortgage.
The mortgage broker’s task is to convince lenders that the borrower is a good credit risk by adding back specific deducted expenses to net income to improve the debt-to-income calculation. While having a sound credit history is very helpful, mortgages can still be obtained for those with less-than-stellar records.
Three essentials for borrowers are: (1) have up-to-date taxes, (2) be organized and (3) consult a mortgage broker long before the mortgage is required.
[Source: The Globe & Mail Inc. and Settlement.Org]