August 18, 2021
August 18, 2021
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It’s a stunning statistic that more than fifteen percent of Ontario residents are self-employed in some way (which includes part-time) – and that figure is growing.
That shows a lot of creativity, ingenuity, and entrepreneurial spirit in this province. It also comes along with, for the small business person, considerable challenges on the personal side – a great example is obtaining a home mortgage.
You’ll know the exact situation if you are relying on only yourself to make a living. The lack of a “standard proof of income” can be a knock-out factor with a bank.
Fortunately, there are resources and strategies you can employ, as a self-employed individual, in order to obtain mortgage financing. Let’s have a look at some of the options and resources out there.
Many financial institutions in Ontario, such as the “big banks”, offer assistance in obtaining a mortgage for the self-employed individual or small business person. They well understand what a hurdle the lack of standard proof of income can be, and have designed services to specifically address it.
Generally speaking, if they offer such mortgage options (not all big banks do), they will require, for example, that you have been in business at least two years, and can show that you have a solid history with your finances and credit management.
This mortgage loan is not for the wannabe landlord. Generally, the financial institution will offer you a mortgage for your dwelling only – the one that you occupy.
Loan amounts are not unlimited, either. A typical example would be a maximum $600,000 mortgage on a property valued at no more than $1,000,000. All this, of course, would be subject to credit approval from the lender.
One very important consideration when applying for a mortgage, whether self-employed or not, but especially if self-employed, is the option of default insurance.
Banks and other lending institutions have come up with valuable policies, so that if by chance you suffer a disability or illness, your loved ones are protected. Your banker may even offer incentives for you to sign up, such as cash-back deals, etc.
It’s well worth thinking about, particularly for someone such as an entrepreneur. The cost of the premiums is generally added to the mortgage amount, so normally, you won’t see a separate billing for the mortgage insurance.
There is a fairly limited selection of mortgage providers in Ontario. They can be separated into three broad groups, based on the differing levels of government regulation to which they are subjected. Following is the basic rundown of what you can expect in the marketplace.
These include all the “big banks” – National Bank, RBC, Scotiabank, TD, CIBC, and BMO. Credit Unions also fall under the same regulations. In general, these institutions are the strictest regarding application scrutiny, and ultimately, loan approval.
They will require you to pass a mortgage stress test, which is essentially a calculation of your suitability as a customer, based on your specific financial inputs. These include:
It’s somewhat complicated, but at the end of it, your result will have to show that you can still make mortgage payments, even at a higher-than-current rate, known as the qualifying rate.
Some A Lenders – National Bank, RBC and Scotia, for example – have mortgage options specifically geared toward the self-employed. Keep in mind, though, that these will have some very specific hurdles for you to jump, in order to qualify.
Self-employed individuals who do not meet A Lender requirements for a mortgage may have to turn to the next level down. Some of the B Lenders in Ontario are: Merix Financial, MCAP, and Equitable Bank, among others.
Generally, you will need to engage the services of a mortgage broker, for this level of creditor, whose services are outlined below. B Lenders are subject to less strict regulation.
Therefore, they can take on clients who might be deemed too risky by an A Lender. As a result, however, the rates they charge will usually be higher.
As mentioned, obtaining a loan through a B Lender will generally require the use of a mortgage broker. It should be noted, however, that the necessity of such a service can have some distinct advantages for you, if self-employed.
A mortgage broker will have access to a lot of information you would normally have to hunt around for yourself. This would include:
Important as it is, a busy entrepreneur may not have the free time and availability for such research, legwork, and analysis. Engaging with a mortgage broker who is an expert in the field could save you both time and dollars. It’s well worth looking into, and as indicated, may actually be a necessity if dealing with B Lenders.
Failing the approval of either A or B Lenders may leave you with no choice but to seek your mortgage through private lenders. These might include stand-alone investors looking to loan out money, as well as groups of investors who have pooled their funds into what is known as a Mortgage Investment Corporation (MIC).
Although this market for mortgages is largely unregulated, it is legal in Ontario, and the rest of Canada. Going this route is by far the most expensive one for the borrower, owing to the larger risk the lenders are willing to take on.
The upside for you is that the process is much simpler, and can include such options as a “stated-income” mortgage. This is something A or B lenders would never allow – you simply declare your income on their forms, rather than providing any documentation or backup.
Be aware that whatever your “stated income” is, it had better be reasonable, and in line with others in your industry or business type, or you will never qualify. It’s important to note also that it will be nearly impossible for you to obtain mortgage insurance with this type of arrangement.
It’s simply considered too much of a risk. Although the private lender route is likely not going to be your first or second choice for a mortgage provider, it’s not a bad thing to know that they exist, even as something to be wary of.
There is some specific documentation you will need to have ready when you embark upon your home mortgage hunt, as a self-employed individual in Ontario (and in fact, across Canada). Foremost, the documentation will include your Notices of Assessment on your personal taxes for the last two to three years, minimum.
Not having these available will severely limit your ability to obtain your loan from an A or B lender. Additionally, you should have ready:
There may be additional requirements or documentation your lender-to-be may have. It’s best to be prepared in advance.
This can be a real issue for someone who has just embarked on an entrepreneurial journey. Suddenly, your steady, predictable flow of income is gone, yet you still are in need of financing for a home purchase.
One viable route is to go through Canada Mortgage and Housing Corporation (CMHC)’s self-employed mortgage program. They are available to:
Specifically, CMHC offers flexibility for the recently self-employed, although there are still the typical eligibility considerations i.e. cash reserves, credit history, etc.. One attractive feature of their offering is their “15% gross-up” you can take advantage of, when providing them with your income verification.
Recognizing that, with sole proprietorships and partnerships especially, income deductions can be made, which lower net income, CMHC allows the 15% add-back to your income when you apply for your mortgage loan through them.
You can rest assured that you do have several viable options, as a self-employed individual in Ontario, to secure mortgage financing for a new home. It will definitely be tougher for you, however, than for the traditional employee who can boast a more predictable paycheck to their lending institution of choice.
In the eyes of the banks, these prospects seem to be the more desirable potential customer. This may be a bit of an unfair assessment, given that:
But the world of finance generally prefers the path of least resistance, or in their eyes, the path of least risk.
It may seem a bit of an uphill battle, but keeping these points in mind (along with, hopefully, building a healthy down payment) will help get you on the road to securing that mortgage loan, as a self employed individual:
All that, along with some patience and perseverance, should see you through to the end goal. The bottom line is, it may be tough. But, as an entrepreneur, as a self-employed individual, it likely isn’t the first challenge you’ve seen, and it likely won’t be the last.
For more information on self-employment mortgage, consider contacting a mortgage advisor to talk about your mortgage options.
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