Are you among the 10% of Canadians who consider themselves to be “self-employed”? If so, don’t be surprised when finding a mortgage is difficult. Lenders are becoming increasingly picky about the people whom they lend their money to. People who are considered self-employed are those who don’t derive an income from being on someone else’s payroll. Small business owners, freelance workers, and professionals such as lawyers and doctors are often among those who belong in this category. Although being self-employed may present you with challenges to getting the home of your dreams, there are options that you can explore to get the funding you need to buy a house. Here are a few:
Plan A: Prime Mortgage
A prime mortgage is the best way to go if you are confident that the lenders will deem your actual income as sufficient or more than enough to qualify for a housing loan. If you have faithfully kept up with your other debts such as your car loan and your credit card expenses, you will have a higher credit score. That may qualify you for a prime mortgage. In addition to keeping up with your debts, you should have a history of filing taxes and have no outstanding balance with the CRA. You should also have paid yourself for the past two years.
Plan B: Subprime Mortgage
While you might gross an amount that you think will be enough for your dream house, note that the lender will be checking your net income, found on Line 236 of your tax return. Ultimately, it will be your net income that spells the difference between a prime, subprime, or rejected mortgage application. The lender will take the average of your income for the past two years to see if your income is steady or increasing. They will do this to determine if they are willing to accept the risk of giving you a loan.
If the trends are stable and your net income meets the lender’s qualifications, then you may qualify for a loan amount that is five times your Line 236 income. That means if you earn a net of $100,000 yearly, you can receive up to $500,000, given that you have a good credit history. If the lender sees that the trend of your income is decreasing, however, the maximum amount that you can get may be equivalent to your Line 236 income. If we continue using the previous example, this means $100,000. You will also have to pass the minimum credit score threshold to get this kind of mortgage, although the required credit score may not be as high as a prime mortgage.
Plan C: Try alternative lending
Self-employed home seekers may have bad credit, insufficient net income, or both to qualify even for a subprime mortgage. Fortunately, traditional lenders are not the only people you can turn to if you want to get financing for your home. You only need to provide alternative lenders with bank statements, invoices, work contracts, and other proof of income. You don’t need to show them that you have paid your taxes and they don’t need to know what’s written in Lines 150 and 236 of your tax return. The downside that comes with this quick and easy scheme is that you have to pay them within the next few years. Additionally, the interest rates will typically be higher than what traditional mortgage lenders will charge. You might also have to pawn your car or other assets as collateral, and finding the right collateral can become your bottleneck. If you have the collateral and you don’t mind losing it in the case of debt default, alternative lenders can serve as a stop-gap measure to get funding while you are still buying time to qualify for Plans A or B.
Plan D: Credit Union
Credit unions are cooperatives that lend money to its members. They are different from traditional mortgage lenders in that the members’ regular contributions and income from the cooperative’s business are what provides them with the money to lend to members who are in need.
The most obvious requirement to get funding through this method is to become a member of a credit union. The membership qualifications vary per organization, but once you become a member, you can tap into the strength that comes in numbers to get the loan that has long eluded you.
You would have to submit your most recent business statements in the last three months and copies of two years’ worth of tax returns. While the credit union would lend you for a property $1M or up, keep in mind that they will charge you interest rates that are as high as 3%.
If you’re looking to buy real estate in Toronto, get in touch with us today – we’re happy to help.