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The self-employed now enjoy mortgages designed for them

Ahh… it’s a favourite daydream of working Canadians: to go into business for yourself! For some Canadians who are self-employed, their situation is the consequence of corporate downsizing. For others, it is a carefully planned decision to leverage their knowledge and experience for themselves and improve their own bottom line.

Typically a very innovative and energetic bunch, the self-employed now comprise approximately 15% of Canada’s total workforce. We like to imagine that these are the lucky folks who are living their entrepreneurial dreams.

But talk to self-employed Canadians about getting a mortgage and many will tell you that the dream can have downsides. These individuals – who may actually be more financially successful than ever – often do not fit traditional mortgage lending criteria. It can make mortgage shopping a frustrating and, for some, a humiliating experience.

Without an established stream of pay stubs from an employer, lenders have none of the traditional assurances that you can meet your mortgage obligations. You may be expected to undergo a long and complicated process to prove your ability to service your debt. Lenders want to verify your employment and your income – not a simple task for someone who is self-employed. Lenders are also looking ahead; they 

will want some evidence that payments can be made for the life of the mortgage – not just over the next year. 

Most frustrating of all, small business owners are usually expected to provide detailed financial statements for their business for the past two years. And what picture do those statements paint for the lenders? An astute business owner with a  good accountant will work hard to minimize taxable income for the business: a smart financial management strategy. But when lenders plug those figures into their lending formulas – they may conclude that you are a high-risk borrower.

The problem is not with the self-employed as a category; it is with lenders’ traditional criteria, and their inability to reflect the different income environment of a self-employed homebuyer.

Thankfully, the lending landscape has adapted to this market need. Certain lenders have designed mortgage products precisely for this very attractive market segment. Naturally, the lender will still need to assess risk, but the criteria are tailor made for the self-employed and essentially take a common sense approach to the definition of income. You could qualify for your mortgage based solely on what you state your income to be, and after confirmation that your lending ratios, credit and tax liabilities are in good order. It can be that quick, that easy!   

For the self-employed – who build their own success on understanding the needs of their customers – the new mortgages designed for them are good business. And they’re also welcome news to the growing number of Canadians who are building their own success in their own way.

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Self-employed get credit for experience

We’ve all heard the old stories. A successful, self-employed Canadian who can work wonders in his or her professional life can’t manage to secure a decent mortgage for a home. It strikes us as both ridiculous and unfair – given that nearly one Canadian worker in six is now self-employed. After all, these are some of the most independent and ambitious people in the country.

Thank goodness that times have changed for the self-employed! Policy changes at the Canadian Mortgage and Housing Corporation (CMHC) have begun to acknowledge the contribution and financial status of self-employed Canadians.

These days, self-employed homebuyers have the same access to mortgages as their salaried counterparts. It doesn’t matter what the nature of your income structure: whether you work on contract, whether your work is seasonal, or whether you’re a small business owner or an independent professional.

Now, newly self-employed Canadians can also get credit for their past work experience. Until early this year, you needed to demonstrate at least two years of employment in your own business, but that rule has been changed. Now, if you have two years experience in your field of expertise – whether you were salaried or self-employed – you can meet the new CMHC standard.

The new guideline is great news for self-employed Canadians who have extensive experience in their chosen field, but who are newly in business for themselves in that field. For example, maybe you’ve been building cabinets for years in a salaried workplace, and have decided to step out on your own. Now you can get credit for your experience.

The CMHC guidelines specify that you should be “performing essentially the same function with the same skill requirements” for your past experience to qualify. For the tens of thousands of Canadians pursuing their dream of self-employment in their field of expertise, the new guideline is great financial news.

The CMHC guidelines apply to any mortgage insured by CMHC… from any institution. It’s worth noting, of course, that some lending institutions are friendlier to the self-employed than others. Many lenders are still most comfortable with the traditional parameters for verifying employment and income. A steady stream of pay stubs is the simplest method of assessing your ability to service the mortgage debt.

If you’ve been self-employed for a few years, your lender may want to see detailed financial statements for the most recent years. That can be a problem. An astute business owner with a good accountant will be working hard to minimize taxable income for the business: a smart financial strategy. But according to traditional lending formulas – that business strategy could flag you as a high-risk borrower.

The most flexible and innovative lenders have discarded the old formulas for their self-employed clients. Some of the best mortgages for self-employed Canadians don’t even require proof of income. You could qualify for your mortgage simply on your own good credit and employment history.

If you’re self-employed, or considering taking the plunge into business for yourself, the latest mortgage news is encouraging. Check out your options… and get the credit you deserve.

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