Currently in Canada, 1 in 5 in the work force are self-employed, a trend that is expected to continue and increase. How does this impact getting a mortgage?
Documenting Your Income
To get a mortgage, you need income. It is possible for self-employed borrowers to either
- prove their income via their personal tax returns, or
- to "state" their income even if that same income number doesn't show up on their personal tax returns.
Here's the kicker. When you have less than 20% down payment, the Bank Act requires the lender to have default mortgage insurance as protection against your default, which is provided by CMHC and backed by the Government of Canada. The last time I checked, the Government of Canada also collects taxes, which sets up an issue currently being debated in government.
Why is the Government of Canada guaranteeing mortgage debt (hence facilitating mortgage loans) for non tax-paying borrowers so that they can get best rates and reduced down payments?
This does not mean stated-income borrowers would not get mortgages, just that the government is currently debating whether or not not to continue guaranteeing those mortgages, If they don't, it likely means higher interest rates and at least 20% down payment for those that wish to "state" their income.
So, as I write in early February 2012, stated income financing could get scarcer and more expensive. And it could happen fairly quickly.
What to do?
If you are self-employed (or thinking about it) and need a low down payment mortgage, start showing more income on your tax returns as you will need to use a two year average to "prove" your income.
If you can save a larger down payment, in the order of 20%, then this reduces the risk of default considerably for lenders and they will be more inclined to give you better interest rates. However, 20% is a pretty big chunk of change these days.
In either event, a good rent-to-own program might buy you some necessary time to get that two year income average up or the required down payment saved.Contact us if you'd like to strategize. If you are thinking about becoming self-employed, absolutely contact us beforehand to make sure you know your options.