If thinking of buying a home and of starting a business in the near future, it might be prudent to get the mortgage sorted while still steadily employed. Starting a business or financing a vehicle can be done anytime, but it is not always easy to obtain a mortgage. Doing things in the right order can help one reach goals years earlier.
If already self-employed, all hope of owning a home is not lost. Self-employment does make a lot of things in life more challenging, but by now you and I have honed our skills to become tenacious and creative problem-solvers!
Here are a few layman tips to increase the chances of approval. Use at your own risk.
1. Maintain a very good credit rating. Fix what you can, pay off outstanding and overdue accounts. If you need to improve your credit score, consider an RRSP loan. Most institutions will automatically approve RRSP loans where the funds are invested in a bank product. Make the loan payments regularly. Use the contribution to reduce your taxable income, this will generate a lower tax bill or a refund come tax time. Take the tax savings and pay down your loan, or keep building up that down payment. Once you are ready to buy, you can borrow your RRSP money to use as a down payment if you are a first time purchaser. In Canada you have 15 years to repay the money to your RRSP account. If you fail to do so you will need to repay the income tax to the government.
2. Save up a down payment. For most people a 5% down payment may be sufficient to qualify, but if you are self-employed and show lower income, or have less than ideal credit, you may need to have 10% or 20% to put down in order to get approved with a competitive interest rate. It is also wise to account for closing costs on your purchase, which can add up to a few thousand dollars. And don't forget moving and improvement expenses, hook-up fees, etc. A sound financial move would be to save 20 - 50% of the cost of your property as a down payment, and choose a shorter term mortgage of 10 to 15 years. Who wants to be in debt for 30 years? That is a huge burden to carry and it can restrict your choices in life.
3. Stay up to date with your financial statements - bookkeeping, income taxes, GST, NOAs, etc. Being able to show the stability of your business over several years and being up to date with your taxes will go a long way.
4. Find the right professionals to help you:
Look for a mortgage specialist that:
A) Knows your situation well and you have a relationship with. Having a relationship with your
banker is important. They are motivated to sell mortgages and you are motivated to buy a home, so
get to know each other - maybe consider doing your weekly banking in person and consider some
simple products like a small RRSP Loan, opening a Tax Free Savings Account, purchasing RESPs
(which are matched by the government in Canada), etc.
B) Has lots of experience and a good track record with lender (not the newbie)
C) Specializes in self-employed approvals and is creative at finding solutions.
D) Has a vested interest in your community and knows the micro trends/conditions. You may have
more success at a credit union for example, than at a big bank.
E) Will give you a written pre-approval amount, and a written approval on your selected property.
E) Will look at your big picture situation, advocate for you and close the deal.
Look for a realtor that:
A) Is willing to work hard for clients in your price range and situation (many specialize in geographic
areas, recreational properties, commercial properties, higher end homes, condos, etc).
B) Is experienced and knowledgeable about the area and type of dwelling you are shopping for
C) Has connections to other well-reputed professionals like 'self-employed mortgage' specialists,
notaries, home inspectors, etc.
D) You connect with and have a gut-sense of trust in
E) Will advise you of all the procedures and requirements you will have to satisfy at each stage of the
process. Get this information up front so there is no surprises.
Look for a home inspector that comes with a lot of references. Ask around. It is very important to have a thorough home inspection completed by a qualified professional. Don't assume the because the realtor recommended them, that they are going to do a great job.
5. Look for an under-valued property that easily fits within your affordability range. It can be wise to double the mortgage payment when determining true housing affordability ( a $1200 mortgage could equal over $2000 monthly housing costs when you factor in home insurance, mortgage insurance, property taxes, utilities, municipal fees, strata fees, maintenance costs, etc...). As their determination is all about ratios and value, make it easy for them to approve your choice. Most people purchase at or near the maximum they qualify for. That can make the lender nervous and slow down the purchase.
6. Try to find a place that you will be happy in for at least 5 - 7 years. With the high cost of moving, experts claim that it takes 7 years to break even on a property. Buying and selling more frequently may be profitable in a hot market, but there are no guarantees that prices will always rise. So consider the neighbourhood, the proximity of work and schools (if you have children), crime, pollution, etc.
7. Don't give up! Look elsewhere. If you are hitting walls at every turn, find out what you need to turn a NO into a YES! Do you need to look for a property in a lower price range, or in another area altogether (they were selling land for $10 in Manitoba recently)? Maybe a property with a rental suite that generates income? Do you need to look for a different lender or realtor - one that is motivated to work with clients in your situation? If you need a bigger down payment, consider what you can sell, how you can save more, or how you can better leverage the assets and resources you currently have.
8. Be careful. Try not to be too desperate and willing to do anything to get into a property of your own. It may cloud your judgement and land you into a stressful situation - perhaps the burden of high debt, or a money pit of a home that needs extensive repairs. You may fall victim to scam artists or agents that profit from 'helping' people get into questionable rent-to-own situations.
The question of whether or not to purchase a home is a controversial one. In generations past, it was a given that buying a home was a wise investment, a right of passage in the pursuit of the American Dream. But times have changed. From a strictly financial point of view, it often makes as much sense to rent a home. With more unsettled lifestyles, many younger people prefer the flexibility and freedom of renting, especially in the extremely expensive larger cities. The right housing decision for you will depend on your own unique needs and situation. Renting is not better or worse than buying. In one case you are renting space, in the other you are renting cash. The intangible factors are what may make the difference for you. For me, it makes sense right now because I've been through enough instability in my life and it was time for my family to settle. We found a place we could afford in an area we could see being happy for years. And being self-employed and looking forward 20 years down the road, it will be a nice favour to my future self if I can retire without a mortgage payment, especially when rental rates are increasing at the pace we are currently seeing.
You work hard and deserve a good home. No matter whether you rent it or buy it, I hope it provides you shelter and warmth and rest for you and your loved ones. Home is where your people are. And where you clean your brushes.
I've never understood why mortgage lenders view being 'employed' as so stable. When you're self employed, you personally are generating income. When employed you're as incomeless as "you're fired".
I totally agree Corey, I suspect bank employees in charge of mortgages don't have the entrepreneurial mindset. Maybe there are statistics that back up the perceived risk of lending to self-employeds. But in the end we don't have a job to lose, so where's the risk? Having a job is becoming riskier than ever. The skills you learn running a business are an asset in creating value and being resourceful. Entrepreneurship is under-valued and a more difficult path for sure, but ease is not the objective in life after all eh? The challenges build resiliency and creativity in looking after one's family.
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