If you’re a freelancer, gig worker, small business owner or independent contractor looking to buy a home, you might have already realized that the process will be a little different for you compared to wage employees. But fear not, you can still secure a mortgage and land the home of your dreams with some careful planning. We spoke to a panel of experts at Vita Lending in B.C. to understand how you can snag the best chance of success.
Mortgages for business owners.
If you’re a thriving small business and making a sizable income, why does it seem so difficult for lenders to hand over home mortgages to business owners?
“Essentially the difference for self-employed and business owners is that they do have legitimate expenses they can deduct. When that happens, your taxable income might look lower than your actual income,” explains Jeffrey Tseng, managing partner at Vita Lending.
By lowering your taxable income by maximizing business expenses and personal deductions, you may be limiting your mortgage potential. There can be a discrepancy between what's on your tax return and how much money you actually earn.
What do you need when applying for a mortgage when self-employed?
As early in the home-buying process as possible, consult an experienced mortgage broker or specialist. Knowing what you will need upfront will decrease frustration and disappointment down the road. “The most important thing besides documentation, [is] to meet an experienced mortgage consultant,” says Shin Ha, managing partner at Vita Lending.
You’ll have to save for a down payment, too. In Canada, down payments are broken down like this:
- A down payment must be at least 5% if the purchase price is $500,000 or less.
- If the purchase price is between $500,000 and $999,999, the down payment is at least 5% of the first $500,000 and 10% for the remaining portion.
- If the purchase price is $1 million or more, the down payment is at least 20%.
If you can offer more than the minimum down payment, that will increase your likelihood of securing a mortgage.
Remember, it’s crucial not to overextend yourself. You want to have adequate income to qualify for a mortgage and to ensure you have money to reinvest in your business.
You may want to consider completing a statement of income. Basically, instead of relying on tax records or other documents to show your income, you make a statement declaring how much you make. If you’re taking the stated income route, stay reasonable in your declaration of income. Your lender will look at an average income for someone of similar experience and occupation.
That may mean they’ll miss certain streams of income, though. By working with a broker, they can help you better navigate and explain your income situation to a lender. “Most importantly we would need to understand how the client conducts their business. For example, I work with electricians or plumbers who receive cash or e-transfers,” says Alan Wu, managing partner at Vita Lending.
Be honest and transparent.
No matter how you conduct your business, explain everything to your mortgage broker. “Believe in [our] abilities. We are working for [you], not banks. Consider us like your family doctor; tell us everything,” Shin explains. Remember, your broker is there to help you. As Alan notes, “It doesn’t matter how you make your money, as long as it is legitimate. Just be transparent how you make your money.”
As a business owner or self-employed individual, some lenders may be able to “gross up” your income, which is where you show how your gross income before taxes is actually higher than what appears in the final taxable amount. Usually, this is because you may have deducted a lot of legitimate expenses, some of which may be discretionary. If you choose to “gross up” your income, you’ll have to show how. Again, work with your broker to determine the best method to go about doing this.
Depending on your credit and the way your business is registered (self-employed or incorporated), some lenders may add 15% to 20% to your total income as a way of adding back some expenses for self-employed applicants. In contrast, if you’re incorporated and have verifiable income, some financial institutions can gross-up your income by as much as 15%. But if you’re issuing a T4 to yourself as an employee of your company, the lender will use whatever salary you report.
As for mortgage insurance, you’ll need it when putting less than 20% down. Which means, for insured mortgages, the maximum purchase price of the property must be less than $1 million. Going the stated income route means you lose access to traditional insurance offered to salaried employees, but most lenders have alternative options for self-employed and small business owners.
Be proactive.
The bottom line is that the best rates are generally offered for those who demonstrate good credit repayment history, are income-qualified and are accurately reporting their income. To ensure the best possible success, make sure you have all of your information as organized as possible when meeting with your mortgage professional. “Because there’s so much involved with dealing with a business or entrepreneur given the additional amount of information needed, do allow ample time for an application to be put through,” says Jeffrey.
Here are some things to bring with you when meeting a mortgage broker:
- Accountant-prepared business financial statements for the last two years (particularly crucial if you’re incorporated).
- Business license documentation.
- Accountant-prepared personal T1 general tax returns.
- Most recent and preferably the previous three years' Notice of Assessment and proof that taxes are up-to-date. Owing taxes can do more damage than anything else. If you owe, pay off immediately.
- Corporate bank statements illustrating current cash flow.
- Bank statements showing regular income for the past six months or longer.
- Be ready to discuss your business. Things like income, business expenses and specific milestones will be among the topics addressed. Remember, be honest about how you make money.
These tips are not exhaustive of everything your lender might ask of you. Take your time to prepare your materials, save for your down payment and consult a mortgage broker as early in the process as possible. They’ll be able to give you a prediction on how confident they are in your ability to get a mortgage.
