This is a recent headline from the Financial Post where they review that it is no longer as easy as it once was for the self-employed to obtain mortgage financing. How very true!
A few short years ago you could tell a lender how much you made, look them in the eye and then promise you would make your payments. As long as you had a great credit rating, that was good enough then, but not any longer. Now you have to provide a whole lot of paperwork and actually prove that you have the ability to make your payments.
My best piece of advice for someone who is self-employed and looking to obtain a mortgage whether it is to purchase a property for the first time or moving up, refinancing a mortgage or looking to purchase an investment property – be prepared!
Here are a few pointers that could make the process go smoother:
- Start early. Meet with your mortgage broker well in advance to discuss what is required to obtain a pre-approval for your financing.
- Ensure that all your taxes are filed and that you don’t owe anything to the CRA. You will need your last two years Notice of Assessments from the CRA at a minimum.
- The larger the down payment, the better. Lenders want to see that you have upfront equity. You must have a minimum of 5% of your own funds and a minimum 10% down payment but 35% is better.
- Have on hand your GST return, business license (if you don’t have one, get one!) and the Articles of Incorporation for your company.
- You will need your last two to three years T1 Generals which must be prepared by an accountant.
- Declare a reasonable income for your profession on your tax return. You might suggest to your accountant that they have a conversation with your mortgage broker if you are considering mortgage financing.
You will want to pass along this note to your accountant – the creative accounting methods used to reduce the amount of personal income tax that you pay is now hindering your ability to obtain mortgage financing. If the income you report on your tax return is low then you are going to have to work harder to justify to a lender that you have the ability to qualify for a mortgage.
An example of that is dividend income. It might be a great idea for tax purposes but it’s a bad idea if you will be requiring mortgage financing. Most lenders consider dividend income as a one-off bonus and will reduce your qualifying income by that amount. If there is a history of dividend income we may be able to request an exception from the lender but I wouldn’t count on it.
It is impossible for the average person to be aware of the changes to lending guidelines for the self-employed, let alone your banker or even the average mortgage broker, as many of the changes have happened behind the scenes. There has been general tightening with all lending guidelines and also some extreme changes. Because of all the changes it is that much more important that you work with an experienced mortgage broker.
You may have to work a little harder and provide more documentation but there are still many options available to the self-employed so please give me a call to ensure that you are in the very best position when it comes time to arrange your mortgage financing.
April Dunn is a Mortgage Broker who has been assisting clients to purchase, refinance or renew their mortgages for over 20 years. April is the owner and the Lead Mortgage Planner of The Red Door Mortgage Group – Mortgage Architects. April and her team provide a full range of residential and commercial mortgage financing for clients all over the province of British Columbia and the rest of Canada through the Mortgage Architects Professional Broker Network. April can be reached at 250-826-3543 or april.dunn@mtgarc.ca