Thanks to Pino Decina at HomeTrust for his post on Self-Employed Mortgage Applicants.
The Canadian workforce is expected to undergo a revolution in the coming years and it is anticipated this will result in more workers being categorized as “self-employed”. Whether operating a small business or working on a contract or consulting basis, the expectation is that in the not-so-distant future, fewer individuals will be considered fulltime, salaried employees.
This eventuality has significant implications for the housing industry. Currently, about 16% of the workforce is considered to be self-employed and as the ranks of the self-employed grow, so too will the frustration this group already feels with the way they have been traditionally served by the country’s big banks. As many self-employed workers know only too well, the major banks don’t exactly roll out the welcome mat when applying for a personal loan or a mortgage.
Home Trust has a different view and believes that being in business for yourself doesn’t automatically make you less worthy of a mortgage. This is evidenced by Home Trust’s long history of providing mortgage loans to self-employed individuals and an application review process designed specifically to service self-employed – or “business for self” – clients. We’ll discuss this process in greater detail later in this Home Trust Mortgages Blog entry.
But before we move on, something to think about; if you are self-employed and intend to apply for a mortgage, do yourself a favour and speak with a qualified mortgage broker. An experienced mortgage broker can take much of the stress out of the application process and help you understand what you need to provide for supporting materials. Your broker works directly with lenders like Home Trust and can present your application to multiple lenders to obtain the mortgage that best matches your needs.
The Major Banks and Self-Employed Mortgage Applicants
Despite the significant number of Canadians who are self-employed, the big banks continue to treat business for self clients as a greater credit risk. Much of this stems from the fact that self-employed workers do not have the same documents to verify their employment and income as someone working for a large, established corporation. There is also the additional risk that the self-employed mortgage applicant’s small business could fail.
To determine the degree of risk this represents, an assessment of the business must be part of the loan review process. Such basic things as an examination of the business’ financial records as well as the business plan are necessary to gauge the viability of the business and this does take more effort than a traditional full-time employment scenario. It also requires employees with the appropriate skills to evaluate the supporting documents. So unless it is a large deal, often times the banks will simply refuse to even consider the application.
Establishing Ownership of the Business
Because business-for-self clients are largely small business owners, it is necessary to provide evidence of not only the business’ existence, but also your relationship to that business. Generally, small businesses fall into one of three categories – sole proprietorship, partnership, or corporation. With each of these types, there are specific documents that you can provide to help Home Trust assess the business – for example:
|Business Type||Required Documents|
|Sole Proprietor||Master Business License|
Business Name Registration
GST / HST Registration
|Corporation||Articles of Incorporation|
Corporate Profile Report
*Partnership supporting materials must clearly denote the percentage of the partnership owned by the applicant
Note that in order to qualify for the best rate, you need to not only have a down payment equal to 20% or more of the purchase price, but must also provide documentation to support the business’s existence.
In addition to these mandatory documents, you may also be required to provide one or more of the supplemental documents listed here:
|Business Type||Additional Supporting Documents|
|Sole Proprietor||Business bank account reference letter|
Notice of Assessment
Current health or safety certificate
Current business license or vendor’s permit
|Partnership||Business bank account reference letter|
Business credit report
Liability insurance certificate
|Corporation||Certificate of Existence|
Letters of Patent
Verifying Income from Business for Self Enterprise
You must also demonstrate that the business is capable of generating the personal income you’ve stated on your mortgage application. The following documents are required to support your stated income:
- Business bank account statements for the previous six months
- Independently-prepared financial statements
- Borrower’s most recent Notice of Assessment
Additional documents may also be required to further establish the reasonableness of the income stated and could include:
- Company-prepared financial statements
- Recent contracts (to show company revenue)
- Invoices (to show company expenses)
Depending on the nature of the business, other specialized documents may also be required such as Commissions Statements for commissioned sales persons. If you have any questions about these documents, or are unsure as to what you need to provide, your mortgage broker can explain what you need to make available to support your application and make sure your file is complete before sending to a lender for review.