Mortgages for contractors have their own set of rules. Here’s how to secure a mortgage if you are an independent contractor in BC, Canada.
Recent surveys show that self — or at least part-time — employees make up for about 15% of all Canadian income earners. They can have a wide range of backgrounds, including administrative, accounting, consulting and so on, and they work for both large and small companies.
However, this demographic segment may encounter difficulties when trying to obtain a mortgage. One of the issues stems from the fact that their full income may sometimes be difficult to prove. Another is that many business owners opt for a higher expense to get a bigger tax reduction — which doesn’t sit well with most mortgage lenders.
But should an independent contractor renounce the benefits of self-employment to secure a mortgage?
Who Qualifies As an Independent Contractor?
Legally speaking, is an independent contractor different from an employer or employee?
Yes. According to the Canada Revenue Agency, some companies or employees try to bypass payroll taxes — such as Employment Insurance or the Canada Pension Plan — by hiring independent contractors.
Individuals that qualify as independent contractors must:
- Be in charge of their own schedule and work activities.
- Provide their own tools and equipment.
- Qualify as a financial risk — the business can either lose or create profit without a safety net.
Loan Options For Contractors
If you are a contractor looking for a home loan, most lenders will ask you to include your personal tax Notices of Assessment over the past 2-3 years in your mortgage application. Independent contractors who are able to provide proof of income should be able to access the same mortgage rates and offers as traditional borrowers. Without this, good credit history is required, and most probably a minimum down payment of 20-25%.
Lenders may also require several other supporting documentation on top of your Notices of Assessment. These include:
- Your company’s financial statements
- Confirmation that your HST and GST are fully paid.
- Contracts backing up your expected revenue for the following years.
- Your personal and business credit scores.
- Confirmation that you are a principal owner in the company.
Temporary Loans For Contractors
If you are a contractor working on an urgent project that requires financing, then a short-term loan can be arranged with a lender. These loans are usually for 12 months and have an interest rate fixed for the loan duration.
Please note that these are short-term loans that require good credit history and a minimum down payment of 20%. These loans usually come with higher interest rates compared to mortgages for contractors.
Business Loans For Contractors
If you are a sole proprietor working as an independent contractor, then you can apply for business loans.
Sole proprietorships are businesses that do not have any employees, and the owner is responsible for all aspects of running the company, such as marketing, accounting and payroll. Therefore sole proprietorship owners can take out a loan to grow their business through purchasing better equipment or hiring new help.
Most business loans are unsecured loans and therefore have a high risk of default. However, with proper planning, a good credit history, and a strong cash flow, you may be able to secure a business loan.
Insurances For Contractor Mortgages
There are no significant differences between mortgages for contractors and traditional mortgages when it comes to mortgage default insurance, as long as the personal tax Notices of Assessments can serve as full proof of income.
A 5 to 19.99% down payment will require you to pay a premium, but anything above 20% will spare you from the extra fee. The premium is added to your mortgage and will be acquitted across the loan’s lifetime.
Without sufficient proof of income, you will be expected to put down at least 20% and search for a mortgage provider who uses Genworth or Canada Guaranty, as they are the only ones providing mortgage default insurance for stated income files.
Hiring a Mortgage Broker
One neat little trick to help you select the most qualified lenders for contractor mortgages is to contact a broker. A trusted mortgage broker can help you secure a loan tailored to your specific needs.
If you decide that using a mortgage broker is for you, make sure that they have extensive knowledge of both the conventional and alternative mortgage markets. A good understanding of the difference between self-employed mortgages and regular mortgages is also essential. Some brokers may not have enough experience in this field and will try to sell you an unsuitable product.
How To Improve Your Mortgage Chances As a Self Employed Individual?
Approach a Trusted Broker
There are many factors to consider when choosing a mortgage broker.
Location, availability and the level of service are all important.
You also want to make sure the mortgage broker you select is licensed by the province where they operate. Don’t forget to ask how much they charge for their services. Some brokers may be more expensive than others, but they might provide better service and more options as well.
Get The Calculations Right Before Applying
You can hire a mortgage broker or do the calculations yourself before applying to the lender. For example, if you’re applying for a home refinance, you could figure out the equity available on your property. Independent contractors should also calculate all their provable and acceptable income and do some research about which lenders would be happy to take their business.
Risk vs. Interest Ratio
When the risk for defaults increases, so do the mortgage rates. A mortgage broker can come in handy again, presenting your case to a lender in the best light possible, ensuring the lender their investment is secure. If you want to work with A-lenders such as Banks or Credit Unions, your credit score, cash flow, and income history are factors your lender will consider when assigning your interest rate.
Private lenders, on the other hand, are more interested in your home’s equity and don’t shy away from bad credit.
Be Transparent
Provide your lender with the full documentation of your personal and business bank accounts to help them get a better understanding of your income and approve a more advantageous rate.
Some lenders will even consider funds in foreign accounts when calculating your income. By being open and transparent with your lender, you have a bigger chance of benefiting from a good mortgage offer. Remember, trust is a two-way street.
Provide The Correct Addresses
Always provide the correct addresses for each rental or other income-generating property. Leasing and rental agreements — or at least the bank statements related to them — should also be included in the application documents. The more details you can provide, the better.
Double-check what the Canada Revenue Agency rule book has to say about independent contractors. While the payback risk is higher for contractors, many lenders have come to trust self-employed businesses.
With proper mortgage advice from your broker and a provable cash flow, you should be able to obtain a beneficial mortgage offer. Get in touch with us if you have any other questions, we’ll be happy to assist you in securing the best mortgage option for you.
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