If you’re a Canadian business owner planning to buy a home, you’re going to find the mortgage application process is a bit more arduous than usual. Lenders will want to perform more due diligence, but it’s just the nature of being self-employed. The good news is, this blog will help you to avoid common pitfalls that catch other aspiring homeowners off guard.
The key to a good mortgage application is learning to think like a lender. What motivates them, and what scares them.
So, if you want a single word to sum up what a lender cares about, it’s ‘risk’. If you can offer them a low-risk opportunity, they can provide you with a more competitive interest rate.
With that in mind, let’s discuss what they consider to be ‘risky signals’ and what you can do about them:
Signal #1 – New Businesses
- Problem: Most lenders require at least a two-year track record for businesses. They’ve been known to make exceptions for professionals like doctors and engineers, as well as people starting a new business in an industry where they’ve already had a long career.
- Solution: If you’ve been in the same industry for many years, start a pre-approval and get the lender to confirm they’ll accept your income. If not, just wait until you’ve filed taxes for two years before you try to buy a home.
Signal #2 – ‘Low’ Income
- Problem: The more you write off, the lower your taxable income. Fantastic for tax planning, but you’ll need to prove that this income should be counted in your application.
- Solution: Some lenders offer a ‘stated income’ program, meaning they’ll look at revenues and expenses instead of tax returns to try and get a more realistic assessment of your income. Sometimes those estimates are still too conservative, and you might be better off writing off fewer expenses for two years to demonstrate a higher income. Speak with your tax accountant if you think that’s a good option.
Signal #3 – Weak Cash Reserves
- Problem: You need to be able to demonstrate that even after a down payment, you have cash in hand to cover unforeseen expenses.
- Solution: Build up as much cash as possible leading up to buying a house. If you have the option, you’ll want to opt for a smaller down payment and keep more cash in your savings. Remember, most lenders offer generous pre-payment benefits, so you have the option to apply a lot of cash directly toward the mortgage down the road.
Signal #4 – Inconsistent Income
- Problem: Lenders want to see either a consistent income or a growing income, and will typically take the most conservative estimates. If for example in 2017 you earned $30,000 and 2018 you earned $130,000, they’ll take a blended average to estimate your buying power. If the reverse is true, where 2017 you earn $130,000 and 2018 earn $30,000, they’ll take the most recent year as your income.
- Solution: Keep this in mind when dealing with your accountant.
Documents You Need to Apply for a Mortgage
To be completely frank, the documentation requirements for business owners can feel pretty heavy. But, if you keep clean records, you should be able to collect them quite quickly. Here’s a quick list of what you’ll need to provide:
- Two years of financial statements prepared by an accountant (only if you’re incorporated)
- Documents detailing your year of incorporation
- 2 years of T1 generals for your personal and business returns
- Bank statements illustrating current cash flow and incoming income
- Your past notices of assessment for at least two years
Keep in mind, that’s a list of likely documents, but it’s by no means exhaustive. You’ll almost certainly be asked for more, so make sure you consult with your mortgage broker or banker early.
Even if you aren’t ready to buy right away, it can take time to prepare and build a strong. By taking the time to by keeping detailed documents, you can set yourself up for success and save a ton of money in the process.