What springs to your mind when hearing the word ‘self-employed’?
Web designers, contractors, real estate agents, startup founders, eCommerce sellers, restaurant owners…
Basically anyone who have primary income from independent client-based work are seen as ‘self-employed’. In North America, 20–30% of the total workforce is self-employed. This number is expected to reach nearly 50% in 2–3 years.
Unfortunately, this growing segment of our labour force has long been underserved by mainstream banks.
The biggest challenge facing self-employed professionals is unpredictable income. This is precisely why traditional lenders regard them as high-risk borrowers.
First, it often takes extra efforts and a little more time to prove income.
As a self-employed professional, you may not have T4, pay stubs or job offer to show. Instead, you should always keep a set of documents all in good order, such as your business contracts, tax returns (especially the summary), T1 Generals, Notice of Assessment (NOA) and financial statements.
They are crucial for lenders to determine your financial position and should be made available anytime. In addition, make sure you are up-to date on taxes. Tax arrears are serious red flags.
On top of penalties and interest, CRA has strong power to take money from your bank accounts or pay cheque. Therefore, lenders tend to stay away from anyone having troubles with our tax authority.
Another tax related problem is write-off.
It’s common that self-employed professionals report high expenses and low income in order to enjoy more tax deductions. But in mortgages, these write-offs make it difficult to obtain debt/income ratios sought by lenders. You need a tax expert and mortgage broker to help you decide on the trade-offs: pay more tax or higher interest rate?
Of course, just like borrowing any other loans, a sound credit score is imperative.
Lenders have guidelines requiring a certain benchmark (e.g. 610~700+ beacon score) for most mortgage products. It doesn’t mean you cannot have damaged records. Just be prepared to explain what happened and always seek advice to improve credit.
Financial planners and virtual CFOs, such as StoneBanc.com, are experts in this field and have been trained to assist you. So make sure to keep in touch with them, regularly.
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