Borrowed from Pam Pikkert in Red Deer, AB:
What your Mortgage Broker wishes the self-employed borrower would understand… This intrepid group of risk takers are entrepreneurial and help keep the economy moving but all too often we meet with these people and have to give news we would rather not give. So let’s look at what we wish they knew.
1. Surround yourself with professionals. You are the expert in your field without a doubt, but that doesn’t translate to being able to do it all.
Having a knowledgeable book keeper and a well-qualified accountant can save you a fortune in tax deductions and time lost. They are in your corner come tax time and heaven forbid through an audit by the CRA. Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
A lawyer is also invaluable. They will protect you against loopholes you didn’t know to look for in contracts.
Mortgage professionals are also a must. A Dominion Lending Centres Mortgage professional can help you with your home, a rental portfolio if you plan to diversify and commercial lending when you are ready.
These Professionals allow you to have the right documentation available for mortgage lending purposes!
2. You can’t have your cake and eat it too. The lending landscape in Canada has totally shifted in the past few years. Long gone are the days of simply stating what you earn without any verification of such and being offered a mortgage with little money down and low rates. If you choose to write off as much of your income as possible to avoid as much taxes as possible, then you will pay a higher interest rate on your mortgage
You have to prove the money you make to get the money you need!
3. You have to keep your affairs up to date. That means getting the accountant prepared financials, filing your annual returns and most importantly paying your taxes. If you have a large outstanding tax balance, you are going to find it nearly impossible to get a mortgage. Taxes trump mortgage in order of who gets paid first so there are no prime or near prime lenders out there who will lend to you until these are paid.
Tax documents need to reflect what you claim as taxable income and have no taxes owing to CRA.
4. The magical number in the mortgage world is 2. You have to have a 2-year history of self-employment with accompanying documentation to be able to proceed with the mainstream lenders in most cases. You also need 2 types of credit each with at least a $2,000 limit to keep your credit strong. Be aware of how debt may affect your purchasing ability. A large credit balance and a high vehicle payment will dramatically affect your ability to purchase a home. That $13,000 line of credit or a $400 vehicle payment will each decrease your purchasing power by $100,000.
The bottom line is this, make sure that you use your whole team. If you are wanting to buy a home within a couple of years then before you go fully self-employed or purchase that new truck or write off all the income you can, talk to your mortgage professional to ensure you are not inadvertently putting your home ownership goals on hold.