Banks love T4 or W2 slips, especially a long history of them issued by the same employer. That’s because they scream “Certainty of employment! Regular income! Low risk of job loss! Ability to service a mortgage!”
The core issue financial institutions have with self-employed people, however, is that their income is harder to prove. And entrepreneurs are incentivized to minimize taxes by writing off as much as possible against their self-employed earnings, reducing what’s shown as income.
Getting a mortgage as an entrepreneur is therefore harder. You’d think that by now it would get easier considering 20 per cent of Canadians earn non-traditional income (this is much higher than pre-pandemic, btw). But it’s not. With determination and good planning though, you can jump through the extra hoops and get your house.
This is how to do it.
Prepare your financial statements, file your taxes and pay the bill
You should be doing this anyway. If you’re not, this is your nudge to stop being disorganized. It’s bad for your business and it’s extra bad for your personal finances.
Hire an accountant. Get your financial statements prepared and taxes filed. Your mortgage lender will require you to present proof that your HST and GST are paid in full and they will also need your financial statements for your business going back at least two to three years. Corporate income taxes are typically paid in instalments. Once you know the amount owing for that, start paying.
While you’re at it, file your personal income taxes
Same sentiment as above. If you’re behind, get on it. Your lender will require your last two to three Notices of Assessment (NOAs), generated by the CRA and found in your CRA My Account portal. They will also need the associated T1 Generals. Think of your T1 Generals as the backup files for your NOAs. Again, this is where a tax professional can be super helpful. If your business accountant can also do your personal income tax filing, that’s a win; one person who’s got the scoop on your full and complete financial picture. If you owe money on your personal income taxes, you’ll need to pay the balance. Mainstream lenders don’t like to approve mortgages for people who owe personal income taxes. Private lenders might consider it, but that’s a much more expensive option.
Revenue pipeline for your business
Banks want to see what you have coming up for contracts, accounts receivables and so on. Their motivation is to understand if the future of your business looks financially rosy, or if there is a risk you might not make the money you say you’re going to make. Literally, prepare to open your books, and show the lender your sales pipeline (contracts, letters of intent, your accounts receivables from your bookkeeping systems, etc.) you have for the upcoming year.
Proof of ownership of your business and the down payment
They will check your ownership and want a copy of your articles of incorporation (if you’re incorporated). You need to show your business licence, too. And, while they’re at it, they’ll want to see precisely where the money for your down payment came from. You will want to show the history of deposits and prepare to speak to the origin of the down payment money. The lender will tell you exactly what documentation you need to prove where the money came from.
Tidy up your debts, keep your credit score in good standing and showcase your net worth
Keep up to date with your payments. Minimize outstanding balances. Ensure you’re not maxing out your credit limits. This advice applies both personally and in your business. Financial institutions view both together when evaluating how responsible you are with your debt.
While you’re reviewing your debts, grab your financial statements for all of your accounts, your assets (investments included) and liabilities. The lender will use all of this to establish your net worth. The stronger the net worth you have, the more comfortable they are lending to you.
With all of these pieces gathered together, you can hire a reputable mortgage broker and get to work. They’ll sweep the market for the best products, rates and terms for you. If you don’t qualify for the mortgage you really want, they may suggest alternative ways to get there, like saving more for a down payment (I always recommend at least 20 per cent down), reducing the price range for your purchase, strengthening your sales pipeline (which is a great idea all the time), or just waiting until you meet more of the conditions. When you’re approved, enjoy the house-hunting process!
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