How to Successfully Get a Mortgage When You’re Self-employed

Key Considerations for Self-Employed First-Time Homebuyers in Canada:

Getting a mortgage to buy your first home as a self-employed person can be tricky, but it’s possible with the right collaboration with a mortgage planning expert. Here are three important things to know.

1. First, it’s important to understand that getting a mortgage can be harder for self-employed people. Lenders need to see at least two years of tax returns and other financial papers to check if your income is stable. To make your application stronger, try to reduce your debt, save more money, and keep your tax filings accurate and up-to-date. Lenders want to see that your income is steady and reliable.
2. Next, having a good financial profile is key. Keep your credit score high by paying bills on time and using credit wisely. Manage your business and personal finances separately and keep good records. This makes it easier to show lenders a clear picture of your financial health. You can also use your assets, like investments or other properties, to help support your mortgage application.
3. Finally, a mortgage broker can be very helpful. They know which lenders work best with self-employed people and can help you access special mortgage deals. They also guide you through the paperwork and make sure your application is as strong as possible.

By focusing on these areas, self-employed people can improve their chances of getting a mortgage. Many self-employed individuals get mortgages every year, and with the right preparation and help, you can too.

What documents are required to apply for a mortgage when you are self-employed?

This is an important question for anyone who is self-employed and considering buying a home in Canada. It’s an even more important question for newcomers to Canada. Will Canadian mortgage lenders accept tax documentation from their previous country of residence? Do they need to wait until they have 2 years of Canadian tax returns to apply for a mortgage?

ANSWER:

Canadian lenders typically prefer Canadian tax returns for self-employed mortgage applicants. However, some lenders may consider tax documentation from an applicant’s previous country of residence, especially for newcomers to Canada.

Three examples of countries whose tax documents Canadian lenders might consider are:

1. United States
2. United Kingdom
3. Australia

These countries have similar financial systems to Canada, making their tax documents more familiar to Canadian lenders. Generally, self-employed individuals need two years of Canadian tax returns for a smoother mortgage application process. This allows lenders to accurately assess the applicant’s income in the Canadian context. There are alternative lending options that do not require two years of Canadian tax returns, which are viable options a mortgage planner can utilize.

Every self-employed person’s situation is different. If you’re self-employed and plan to apply for a mortgage, it is recommended to speak with a licensed mortgage broker who is experienced with self-employed applicants.

How can newcomers to Canada build credit quickly?

Building credit is one of the first steps that newcomers to Canada can take in order to achieve financial success and meet their goals such as purchasing a home. Here are some easy ways that newcomers can begin to build a positive credit history in Canada:

1. Secure your start: Start with a secured credit card. You’ll need to provide the bank with a deposit of funds, but it’s easier to get a secured credit card than an unsecured credit card. Once you have the card, use it for small things that you already buy, such as a transit pass or groceries, and pay it off every month.
2. Climb the credit ladder: After 6–12 months of good use, you might get an unsecured card. This shows you’re a trustworthy borrower. If you are offered a pre-approved unsecured credit card, take it. You can also apply for an unsecured card.
3. Master the 30% rule: Keep what you owe under 30% of your credit limit. This is known as credit utilization. The less of your available credit that you are actually using, the better it reflects on you as a credit risk. This shows good credit management and helps your score. The reverse is also true – having maxed out credit cards is bad for your credit.
4. Quality over quantity: Don’t apply for lots of credit cards at once. Each application can lower your score. Instead, spread out applications and use your current credit wisely.

Is there a minimum account balance required to get a mortgage in Canada?

Secure your closing costs: In addition to your down payment, lenders usually want you to have 1–1.5% of the home’s price in cash. This helps you cover closing costs like legal fees and land transfer taxes. Having this extra money shows lenders you’re ready for homeownership beyond just the down payment.

How do I choose a mortgage broker?

Working together with the right mortgage broker is an essential part of the home-buying process in Canada. Brokers who lack experience with self-employed applicants may not give the best advice to home-buyers that work for themselves.

When choosing a mortgage broker as a self-employed person, here are a few things to keep in mind:

1. Has a track record of successful approvals for diverse mortgage scenarios
2. Provides clear, honest advice
3. Availability and responsiveness
4. Range of lender partnerships

What does a good mortgage broker do?

Whether a mortgage applicant is self-employed, employed as a T4 employee, or is retired, they will always have their clients’ best interests in mind. If you are new to Canada, having a broker with experience in this area is even more important. A quality mortgage broker will:

1. Assess your specific financial situation: review income, debts, and credit to determine mortgage eligibility.
2. Advocate for clients: negotiate with lenders on behalf of my clients, especially those with non-traditional income profiles (e.g., self-employed, commission, bonus)
3. Problem-solving: Customize creative solutions for challenging situations, such as variable annual income
4. Listen to the client: They will ensure you understand every part of the process, and listen to your questions and concerns.

How do you know if a mortgage broker is good vs. not that great?

1. Tailored solutions and education: A great mortgage planner learns about your financial situation and goals to give you the best mortgage options. They explain each choice in simple words and don’t just push the easiest or lowest-rated option. Instead, they find the best fit for you. A bad broker might give the same option to everyone or rush you without explaining.
2. Proactive communication and problem-solving: A great mortgage planner keeps you informed, spots problems early, and fixes them. They answer your questions quickly and stay in touch even after your mortgage is done. If problems come up, they use their skills to find solutions. A bad broker might be slow to respond, leave you confused, or give up easily.

If you are considering purchasing a home, especially if you are self-employed or a newcomer to Canada, Kola Ifabumuyi is happy to answer your questions at no cost. He can be reached by email at kola@mymortgageplanner.ca and by phone at 416-709-7400.