Lenders like borrowers who have steady, dependable incomes. It’s no surprise, really: they want to lend money to people they know will pay them back. Full-time employment with a trusty T4 that clearly shows income reassures them you’re good for it. So where does that leave freelancers, entrepreneurs, contractors, small business owners and other self-employed folks without T4s?
“There isn’t one simple answer,” says James Harrison, mortgage broker with mortgages.ca. “Buying a property when you're self-employed is certainly possible – I help people do it all the time. But it CAN come with additional costs and challenges, and the biggest one is how self-employment income is calculated and declared personally.”
How lenders look at self-employed income
A person who earns $100K in a traditional job will have a T4 that shows they’ve made $100K that year, and lenders will take that at face value. But it’s not quite as straightforward when you aren’t an employee. As a business owner, you can write off business expenses for everything from travel costs to professional fees to office supplies. Those write-offs are great from a tax perspective. Say you’re making that same $100K: $40K in write-offs will bring your taxable income down to $60K, cutting the tax you have to pay pretty considerably.
When you go to qualify for a mortgage, however, having a lower taxable income isn’t a benefit. To a lender, your income is the amount that appears on line 150 of your tax return – not the $100K you actually brought in. And that makes a big difference in how much you'll be qualified to borrow.
So what’s an entrepreneur to do?
According to James, you have a few options. One is to set yourself up for a traditional mortgage. That may mean not writing off your business expenses for a couple of years to bring up your taxable income. (Lenders usually ask for two years’ worth of tax returns from self-employed borrowers.) That's hardly ideal, though. You’ll end up paying a whole lot more in taxes than you need to. Definitely talk to your accountant before going down this road.
Another option is to get a full-time job for a couple of years to show lenders some stability. But when you've tasted the freedom and satisfaction of being your own boss, who wants to go back to working for someone else? Plus, doing so can derail the progress of your business or your freelance career. And you have to wait to buy as property prices keep going up.
Stated income: the common sense approach to borrowing
The option many self-employed home buyers go with is “stated income.” It’s exactly what it sounds like: you state how much your income is, without having to back it up with a number on your tax return. Basically, a lender who accepts stated income mortgages is willing to accept that your income is higher than what your return says. Of course, you do have to prove it: they may ask to see contracts with your customers, bank statements, financial plans, accounting records, and other forms of income verification.
And not every lender offers this option, so you’ll need to work with a well-connected mortgage broker, who can give you access to those that do.
Read more: Should I work with a mortgage broker?
With a stated income mortgage, you’ll pay more
If you're putting down less than 20%, it will be an insured mortgage – one for which you (or any other buyer with less than 20% down) must pay for mortgage loan insurance from CMHC or Genworth. And with the stated income option, your premiums for that insurance will be a lot higher: 5.8% instead of the standard 3.1%.
“The higher price can be worth it to get into the market,” says James. “If you wait until you actually have 20% saved, home prices could have gone up so much that you won't have saved any money or you could even be priced out of the market completely.”
If you do have a down payment of 20% or more, you won’t have to pay the insurance, but your lending rate will still be higher than it would be for a buyer with a T4: James estimates something in the 2.7% to 3.5% range. There’s also a lender and broker fee at closing for 1.5% to 2% of the mortgage amount.
It’s not your only option
If you can’t get a mortgage through a stated income program, you can also turn to alternative lenders, credit unions and private lenders. An experienced mortgage broker is your best guide to those other options.
“Getting financing is harder when you’re your own boss and usually costs more,” says James. “But for many of my clients, if it means they can get into the market sooner, they consider those extra expenses a cost of doing business.”
Are you self-employed and looking to buy a new home?
Talk to a property.ca agent. They have strong networks that include trusted mortgage brokers who have helped clients achieve their homeownership dreams.