Being an entrepreneur provides many advantages. You are in charge of deciding how your business will operate, what hours you will work, and how you want to shape the trajectory of your career. Yet, as with all good things, there are challenges to being an entrepreneur. One challenge, faced by many entrepreneurial Canadians, is obtaining a mortgage when they’re starting out.
Being an entrepreneur does not prevent you from getting a mortgage, but it can make the process more difficult. The main reason that entrepreneurs have difficulty obtaining a mortgage is because income is one of the primary ways to qualify you as a mortgage applicant.
As an entrepreneur, it is not always easy to prove your earned income when you are just starting your business. Most entrepreneurs will expense as much as possible to their business, in order to minimize taxes payable. This creates a disparity between their stated income and their actual, earned income.
If you looking for mortgages for entrepreneurs, watch the video below to understand the ground rules that will help you succeed in this process:
3 Common Mistakes When Applying for a Mortgage as an Entrepreneur
Many often wonder, “Can I get a mortgage if I am an entrepreneur starting out?” The answer is ‘yes’, but you may need to work with a professional to be successful in the long-term.
At Main Street Mortgage, we often encounter entrepreneurs who make mistakes that can cause unnecessary barriers, when applying for a mortgage.
Hiding & Inflating Income
If your business is in the early stages, you sometimes receive payments through barter or in cash. These are fine if the income is reported for tax purposes. If it is not then lenders will see less income.
The amount of income you make is an important consideration when deciding how much you can spend and borrow to purchase a house. On the other side, some entrepreneurs overstate earnings to improve mortgage approval.
Your mortgage rate will have to be reviewed and passed, and if you are approved for a mortgage that you do not have the means to repay, you can damage your credit score by missing your payments in the future.
Inaccurate Records of Debt & Credit
Lenders will be able to deduce bills from your income to create a fair picture. If you conceal debt, you are putting your mortgage plan at risk. If a lender discovers this, it will weigh heavily against your approval.
Lenders and mortgage providers also wish to see an accurate record of credit and prompt repayment. If you fail to disclose this, or you have not built credit, you can be considered a higher risk client, and entrepreneurs are already considered higher-risk due to their lack of regular compensation.
Failing to Save
Mortgages in Canada tend to be shorter and often require larger down payments. Many people will not effectively save before applying for a mortgage. Entrepreneurs can sometimes be required to have 10% or more for a down payment, so budgeting and saving appropriately is important for an easier application process.
Additionally, if you are a new immigrant and an entrepreneur as well, it is important to note that if you should aim to put down about 35% of the purchase price and produce a bank statement showing 12 months’ worth of mortgage payments. If you are able to do this, you will generally be approved, but the money has to be in Canada.
Securing a mortgage as an entrepreneur can be challenging, but not impossible. Make sure you avoid the mistakes we just covered and work with a trusted mortgage expert, like one of the specialists at Main Street. We can help you secure your mortgage easily and properly.
Tips for Applying for Mortgages for Entrepreneurs
When applying for a self-employed mortgage as an entrepreneur, the process will typically require additional documentation and paperwork from the applicant. It can also lead to a higher mortgage rate — if you don’t understand how to navigate the process properly.
What causes this situation for applicants who are entrepreneurs? As we mentioned above, most entrepreneurs will follow the common practice of writing-off various business expenses to reduce their tax burden. These write-offs may include vehicle expenses, travel expenses, rent, supplies, utilities, and donations to charity.
As a result, most entrepreneurs show little income on paper, otherwise known as their stated income. This low stated income will make their mortgage rates higher than they would for a regular T4’d employee. Of course, you can always choose to state more on your income tax, but you will pay more tax and, in comparison, the decreased interest rate is not always a great trade-off. It will depend on your specific situation.
If you want to access the same mortgage rates as traditional borrowers, you will need to provide personal tax Notices of Assessment from the past 2-3 years and include them with your mortgage application. This proof of income is one way to show your actual, earned income to lenders.
Additionally, when applying for a mortgage you may be required to provide the following documents:
- Proof that you are the principal business owner.
- Financial statements prepared by a certified accountant.
- Proof to HST and/or GST paid in full.
- Contracts, current and future, with expected revenue for the coming years.
- Credit score for both you and your business.
If you cannot provide proof of income, you should ensure that you have good credit history and can provide a minimum down payment of 10%. If you can often write off expenses, we recommend limiting these significantly two years prior to applying for a mortgage to help offset the negative impact it can have on your debt-to-income ratio.
You may also apply for certain programs through Canada’s default mortgage lenders. To qualify for these programs, you will need to provide a 2-year history of managing your credit and finances responsibly. You can learn more about the programs available here:
Regardless of how you apply for a mortgage as an entrepreneur, we recommend working with a professional who is experienced in dealing with mortgage applications from entrepreneurs. The documentation requirements will vary based on the nature of your business and it helps to have the support of an expert.
Make Your Mortgage Application Stand Out
If you are looking to apply and secure a mortgage as an entrepreneur, we have a few tips to help increase your chance of approval:
Build a Strong Credit Score
Prior to beginning the application process, focus on building credit. In any borrowing situation, a higher credit score will make you a more attractive candidate and help qualify you for a better mortgage rate.
Pay Off Consumer Debt
Proving you are capable of regularly making mortgage payments is paramount to receiving a better mortgage rate, and having a record of paying off debts will show this to lenders. At the time of your application, if you are able to pay off your credit cards and any other loans, you may even qualify for a higher loan amount because you will have more cash flow.
Save Enough for a Large Down Payment
A bank or lender will see you as less of a risk if you are able to put more cash into your home upfront. By offering and paying for a larger down payment, you will have higher equity in your home, and you will be less likely to walk away from it. Even better, proving you have significant cash reserve will demonstrate you are able to keep making monthly payments, should anything happen to your business.
Working with professionals who understand the circumstances and the options available will help you navigate this process easily and access the mortgage you deserve.