Ask any self-employed homeowner to tell you about their home buying experience and you are bound to hear at least a few tales involving grumbling, headache, and stress. The self-employed have always had an uphill battle when applying for a mortgage, but thankfully that may be about to change.
CMHC Chief Commercial Officer Romy Bowers stated that the self-employed represent a significant portion of Canada’s workforce and the new policy would allow this demographic to, “benefit from competitive interest rates.”
Moreover, those that have been operating their own business for less than 24-months or have been in the same type of work for less than 24-months will also be able to benefit from the amended policy.
Even though getting a mortgage is about to be easier for the self-employed, it does not necessarily mean traditional nine-to-fiver’s will no longer have an advantage over the self-employed (we don’t see that changing anytime soon). Thus, you still need to follow these best practices (practices every aspiring homeowner should follow, anyway) in order to raise the chances of qualifying for a mortgage.
Starting Oct. 1, Canada Mortgage and Housing Corp. (CMHC) will allow lenders to broaden the types of documents used when pre-qualifying a self-employed applicant:
Keep ridiculously accurate financial records
Since traditional workers have their income reported by their employers, their chances of being pre-approved are much higher by default. This isn’t to say that the self-employed are handicapped – they just have to keep extremely detailed and accurate financial records. That does not mean you should start charting graphs for your lender, but it does mean that you must account for every earned cent earned. To put it another way, you must be able to prove how and why you are getting paid. This can be as simple as keeping a copy of your invoices and e-mail correspondents, just as long as you are able to answer the how and why of your business.
Maintain your credit score
Your credit score will arguably never be more popular than when you are considering buying a home – and that could be a bad thing if your credit score isn’t so healthy. As you shop for a lender, your credit score will be impacted with, ‘hard inquiries,’ which will lower your credit score slightly and temporarily so be sure to have at least a fair-to-good credit score in order to absorb the slight decrease. Beyond that, proving that you have a healthy credit score while being self-employed lets lenders know that pre-approving you may not be risky after all.
Be prepared to pay extra
In the end, be prepared to pay a little extra than your traditionally employed neighbours. This means you may have to pay a higher down payment, a higher interest rate, etc. Depending on your situation (i.e. location, spouse’s income, dependents, etc.), your lender may be able to work with you to lower your costs across the board, but it’s best to be prepared to pay more.
While lenders are gearing up to make the approval process for the self-employed more flexible than ever, it’s a process that still favours traditionally employed Canadians over the self-employed – and that’s not changing for now. It comes down to being a numbers game, and the self-employed are merely more of a risk than their traditional counterparts. It doesn’t mean being approved for a mortgage is any different, it just means you have to play by different rules. Even so, by following these best practices and simply speaking to your lender, you can successful raise the odds of getting pre-qualified and getting on the fast track to that dream home. Looking forward to working with you on your next home purchase!