Mortgage Options For Self-Employed
Around half a million Canadians become self-employed every year.
Many of these people will need a mortgage loan sooner or later and if you’re one of them, it’s comforting to know there are options for you out there as well.
Changes in Regulation
After the market crash in 2008 and the economic crisis that followed, the requirements for a mortgage got a lot stricter. So accordingly, as of April 9th, 2010, Canada Mortgage and Housing Corporation (CMHC) raised the required down payment amount, at the same time decreasing the percentage at which a self-employed individual can refinance an existing mortgage.
At the end of 2014 the Canadian banking regulator – the Office of the Superintendent of Financial Institutions (OSFI) introduced Guideline B-21, a regulation that requires federally regulated banks to look closely at self-employed mortgage applications before approving a mortgage.
Additionally, banks aren’t allowed to lend more than 65% of the property’s purchase value to self-employed, 10% less than the previously allowed amount.
Credit unions aren’t regulated under the Guideline B-21 and can lend up to 80% of the property value to self-employed without default insurance.
How To Qualify For A Mortgage As Self-Employed
What creates the confusion is not only the change in mortgage regulations but the fact that there are different rules for self-employed individuals that have been self-employed for less than two years and those that have been self-employed for more than three years.
Essentially, you fall into one of the following categories:
- A self-employed individual
- Business-for-self (BFS) borrower
Regardless of which category you fall into, to be eligible for a mortgage, you will be required to present proof of your income for the last two years.
However, if you’ve been self-employed for longer than three years, you can’t use a stated-income product.
The Maximum Amount You Can Receive
However, if you have no way of proving your income, you will be looked at as a higher risk applicant and potentially be declined a mortgage.
Canada Mortgage and Housing Corporation (CMHC) offers default mortgage insurance for individuals who have been self-employed for less than three years.
This mortgage requires you to place a down payment of only 10% of the purchase price, meaning that the loan to value (LTV) ratio is 90%.
This product is available as of April 9th, 2010. Before that, the regulations were more lenient so the maximum LTV allowed for self-employed was 95%, meaning the downpayment required was only 5%.
If a business-for-self borrower wants to refinance their current mortgage, the LTV required now is 85%, reduced from the previously required 90% of the home’s value.
Your Occupation and Your Income
It’s important to note that there has to be a connection between your occupation and the income you state.
Lenders and insurers know the tax write-offs that BFS borrowers can leverage, but they make their decision based on your credit rating and the average income you’ve stated for specific fields.
One of the downsides is that any minimal blemish in your credit history is viewed more seriously when you apply as a self-employed person or a BFS borrower and may result in you being declined the mortgage.
Working with a licensed mortgage professional that will be able to give you an assessment and a mortgage pre-approval can be one of the best financial decisions you make.
It will allow you to go look for a property knowing what you can afford and how much you can spend.
This will not only shorten the time required to find a property but it will also make the whole process a lot less stressful and time-consuming.
Make sure you don’t misunderstand pre-qualifications and pre-approvals as both are completely different mortgage terms.
Pre-qualifications take into consideration only the general financial indicators you present to the mortgage agent, while pre-approvals look more into details, including your credit score, history and current finances.
If you’re not able to get a pre-approval or a mortgage default insurance, you can expect to qualify for around 50% to 75% of the property value.
This means that you would have to have enough funds to cover a higher down payment.
Finally, remember not to take the pre-approval as a definite fact. It doesn’t mean that the pre-approval and the final approval mortgage rates will be the same.
What happens during the time when you’ve been pre-approved to the final mortgage application can change your whole credit score, including the amount of mortgage you will be allowed, as well as the interest rates you will get.
If you don’t qualify for a mortgage, there are always other options available, primarily private funding.
There are many mortgage professionals who have been working in the field for years and know private investors who are willing to lend funds to self-employed and BFS individuals.
Although this is not the number one choice for most people due to the high-interest rates and costs, it may be the only option for those who were declined a mortgage to find the money they need to buy a property.
Expectedly, private funding loans come with a higher interest rate that is 12% on average, as well as higher fees due to the bigger risk the lenders undertake.
The total costs and fees for obtaining private funding loans will be disclosed to you prior to signing the agreement so you can know your overall expenses.
The third important aspect of private funding is the type of real estate you’re buying.
Private investors are interested in the type of real estate you’re buying and will lend you the money based on their belief of how marketable and sellable the property is and will be in the future should the mortgage go into foreclosure.
We are dedicated to giving you the most helpful mortgage advice and giving you the best mortgage service, no matter what your needs are.
As mortgage agents who specialize in self employment mortgages, you can be sure that we have the solution for you that will take away all of the stress and get the best mortgage product for you. It’s something that we at Dominion Lending Centres take very seriously.
Get started today by applying online – it’s free and takes less than 90 seconds. Apply here at: https://www.goodadviceforabetterlife.ca/application/