For some Canadians who are self-employed, their situation is the consequence of corporate downsizing. For others, it is a carefully planned decision to leverage their knowledge and experience for themselves and improve their own bottom line.
Typically a very innovative and energetic bunch, the self-employed now comprise approximately 16% of Canada’s total workforce. We like to imagine that these are the lucky folks who are living their entrepreneurial dreams.
But talk to self-employed Canadians about getting a mortgage and many will tell you that the dream can have downsides. These individuals – who may actually be more financially successful than ever – often do not fit traditional mortgage lending criteria. It can make mortgage shopping a frustrating and, for some, a humiliating experience.
Without an established stream of pay stubs from an employer, lenders have none of the traditional assurances that you can meet your mortgage obligations. You may be expected to undergo a long and complicated process to prove your ability to service your debt. Lenders want to verify your employment and your income – not a simple task for someone who is self-employed. Lenders are also looking ahead they will want some evidence that payments can be made for the life of the mortgage – not just over the next year.
Most frustrating of all, small business owners are usually expected to provide detailed financial statements for their business for the past two years. And what picture do those statements paint for the lenders? An astute business owner with a good accountant will work hard to minimize
taxable income for the business: a smart financial management strategy. But when lenders plug those figures into their lending formulas – they may conclude that you are a high-risk borrower.
The problem is not with the self-employed as a category it is with lenders’ traditional criteria, and their inability to reflect the different income environment of a self-employed home buyer.
Thankfully, the lending landscape has adapted to this market need. Certain lenders have designed mortgage products precisely for this very attractive market segment. Naturally, the lender will still need to assess risk, but the criteria are tailor made for the self-employed and essentially take a common sense approach to the definition of income. You could qualify for your mortgage based solely on what you state your income to be, and after confirmation that your lending ratios, credit and tax liabilities are in good order. It can be that quick, that easy!
As more lenders enter this market niche, you’ll find that not all products are equal. As a group, the self employed often delegate to other professional service providers and this is a situation where you may want to seek advice from a professional mortgage consultant so you get the best mortgage for your needs.
For the self-employed – who build their own success on understanding the needs of their customers – the new mortgages designed for them are good business. And they’re also welcome news to the growing number of Canadians who are building their own success in their own way.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.