Self-employed? Avoid the hassles when getting a mortgage

Approximately 15% of workers in Canada are self-employed.

While the percentage is lower in Québec, there are nevertheless 560 000 self-employed workers in the province. These include all types of freelancers, such as actors, musicians, comedians, journalists, web developers, consultants, translators, marketing communications specialists, financial planners, notaries, accountants, lawyers, engineers, etc. In fact, self-employed workers are part of almost every profession and trade.

People who have enough self-confidence in their ability to find their own clients and prosper in an environment that is not bogged down by the red tape of a large company are often tempted to set off on their own. After all, there are many advantages to becoming your own boss. You organize your schedule as you see fit. You work when you want. You develop your own work methods. And, of course, you reap the rewards of your efforts!

However, there are some downsides. You have to take care of all the paperwork, which means you must be self-disciplined, pay attention to details and constantly manage all the administrative tasks your small business requires: paying suppliers, following up on unpaid bills, invoicing, paying taxes, setting aside money for income taxes, keeping inventory up-to-date, scheduling, and much more. These tasks come back—time and again—and cannot be ignored.

Who understands you better: the bank or a mortgage broker?

I am sure you have already heard some horror stories regarding problems self-employed workers and owners of small businesses have faced when trying to get or refinance a mortgage.

For some financial institutions, self-employed workers are seemingly not part of the norm. They prefer refusing applications than trying to find a solution that will benefit everyone. Tacking the never-ending bureaucracy is like trying to cross a minefield. 

Having experienced the hassle of trying to get a mortgage as a self-employed worker, I know one thing is for sure: there are some things I will never do again. First, I will not rely on a bank employee to impartially support me. I am not trying to be disparaging. Bank employees that oversee mortgages will always look out for their employers’ best interests and favor situations that will help to achieve corporate goals. I, on the other hand, want to have down-to-earth conversations with professionals who truly understand what it’s like to own a business and be self-employed.

Because mortgage brokers are also self-employed, they are the best-suited to understand the realities of entrepreneurs.  

What’s different about a self-employed worker’s mortgage?

It’s important to remember that for many self-employed workers, revenues are cyclical and cannot be guaranteed on a regular basis. It is therefore difficult to determine a consistent, average monthly revenue. With a job held over several years, it is easier for an employee to present a financial portrait with stable revenues; a letter from an employer and pay stub is usually enough. In addition, good jobs offer long-term security, insurance and group pension plans, and other benefits. The ratios used to calculate a mortgage are based on gross revenues. Because financial institutions require stable revenues, they demand more documentation from self-employed workers. A mortgage broker understands the ins and outs of these requirements.

For entrepreneurs, proving that they can generate recurring revenues and adhere to ratios can be complex and difficult. Financial institutions will ask for two years’ proof of net revenues AFTER all expenses. This is the main issue! The maximum amount a self-employed worker can borrow is much less than an employee. Although a program is available for self-employed workers that have a major gap between their gross and net revenues, not all financial institutions offer it.

Entrepreneurs also face challenges from an income tax standpoint: some finance their lifestyles or expenses with their collected sales taxes and amounts eligible for income tax. This can cause major issues when it comes time to remit the sums owed to the provincial and federal governments. Financial institutions tend to steer clear of these situations and take as little risk as possible: they do not want to get involved in legal mortgages with the government should income and sales taxes not be paid.

This means that more documentation will be required, such as T1 forms, federal and provincial notices of assessments, and tax declarations. Sometimes, income tax returns and information regarding your company’s incorporation may also be needed. The paperwork doesn’t even end there! You may even have to provide your bank account statements! 

Tips to survive the mortgage process

If you are self-employed or own a small business—and are looking to buy a new home or refinance your mortgage—here are some handy tips:

• Manage your professional and personal budget impeccably  
• Sign mid- and long-term contracts with your regular clients
• Pay your income and sales taxes on time  
• Keep all of your documentation in a safe place  
• Keep an eye on your credit score
• Don’t just use dividends for pay; make sure you give yourself a salary, too  
• Wait until you have several consecutive years of good business before applying for a mortgage  
• Apply for a joint mortgage with a spouse who is an employee (it’s a definite asset!)  
• Ask a family member to endorse you  
• Save for a 20% downpayment, if possible. Financial institutions will demand at least 10% (whereas for an employee, they will only require 5%)