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May 13, 2021

Mortgage market tightening up for self-employed

You'd think being a self-employed professional or running an established small business would make someone an appealing prospect for a mortgage.

Truth be told, many successful individuals don’t fit traditional mortgage lending criteria.

Without an established stream of pay stubs or a confirmation letter from an employer, lenders have few of the traditional assurances that you can handle your mortgage obligations.

What's more, a fair portion of the money coming in to the business may be deductible overhead costs which reduce your net income – the number underwriters typically rely on to determine creditworthiness.

As a small business owner, you’re usually expected to provide detailed financial statements for their company for at least the past two years. However, if the net profit of the business has declined thanks to the recession, lenders may give greater weight to the most recent year’s figures instead of a longer-term average.

The key here, say mortgage experts, is to calculate and highlight all the “add backs” to determine the true net income from your business. You can include items like depreciation or home-office expenses, for example.  

In some instances, small business owners opt for “stated income” mortgages where lenders don’t verify the borrower's income so closely. 

These are available even if you’ve been self-employed for only a short time, providing you have experience in the relevant industry. But they can be costly.

Since it's a riskier loan from the lender's perspective — someone might overestimate or even exaggerate their income to get approved — the interest rate is usually higher, as might be the insurance premiums.

Last month, CMHC started tightening the rules for self-employed borrowers who don’t provide detailed tax records, insisting that they put down at least 10 per cent when purchasing a home, rather than the previous five per cent.

If you work for yourself, have you had trouble obtaining a mortgage? What helped turn the tide in your favour?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...