As working habits change, more and more Canadians are turning to self-employment and freelancing in order to make their way in the world. Recent statistics suggest that, at present, more than 15% of Canada’s workforce is self-employed. Despite this growing trend, it’s seemingly more complicated than ever for a freelancer to get a mortgage.
The freelancer has to comply with the same rules as a house hunter with steady employment. However, they must go the extra mile to prove that they do indeed meet all the criteria, and will continue to do so in the future. It’s not easy, but with a few pointers and some forward planning, you can learn what you need to do to apply for a mortgage when you’re freelancing.
Prepare Your Paperwork
The most important thing a freelancer must do when applying for a mortgage is to have their paperwork up-to-date and readily available. Lenders will want to go through your accounts, bank statements and tax returns with a fine tooth comb in order to accurately assess your situation and determine whether you’re a risk or not.
You will need to have been declaring your freelance income for a minimum of 2 years before a lender will even consider your application. Tax returns detailing your monthly income for the previous 2 years will be used to work out a 2-year average income. All paperwork should be prepared in advance with the aid of a certified accountant.
Dig Deep for the Down Payment
As a freelancer, if you can ensure a large down payment, your application will be far more appealing to a lender. You will need to prove that the down payment was not gifted to you, and will likely be required to submit a minimum of 3 months’ worth of bank statements to prove you’ve accumulated the savings on your own.
A minimum down payment of 35% is typically required for a freelancer to avoid paying compulsory mortgage insurance, compared to 20% for those in regular employment. Additionally, it’s good to have proof of a healthy balance in your savings accounts, which suggests you have backup funds if your income is a little lower some months.
Cut Down Your Expenses
Most freelancers and self-employed individuals are encouraged by their accountants to claim as much in business expenses as they can. While this is good practice and reduces your taxable income, it doesn’t look so good on paper when you’re applying for a mortgage. This is because it appears as if your income is lower than it actually is.
For example, if you’re earning $5,000 per month, but claim $2,500 in business expenses, your net income on paper will only be $2,500 minus taxes. This doesn’t look great to the lender, who will be looking for regular and consistent—if not growing—monthly earnings. The more you earn, the more you can borrow and the higher the chance of your mortgage application has of being approved.
As a freelancer, planning ahead is essential when considering taking out a mortgage. You simply cannot leave things to the last minute and hope for the best, as the regulations regarding self-employed borrowers are ever tightening. The best practice is to work to a 2 to 3-year plan.
In this time, it’s of the utmost importance that you’re declaring all of your freelancer earnings, and building up a stash of all the necessary paperwork—business license, tax returns, bank statements, etc. Cut down on your business expenses and be sure to square all of your finances with a certified accountant.
In the years and months leading up to your mortgage application, your number one priority should be ensuring your income is consistent, attractive and preferably increasing over time. You will need to make certain sacrifices and avoid anything that will dramatically impact your average income, such as long vacations and sabbaticals. The aim is to have as high an average income over the course of 2 years as possible.
At the same time, be sure you budget wisely and build up a healthy savings balance which you can put towards an attractive down payment. You can also work on your credit score, raising it as high as possible.
It might not be easy, but it’s certainly not impossible either. As a freelancer, it may seem as if you have to jump through hoops and bend over backwards in order to prove you’re just as financially secure as someone with a regular job. However, with a solid plan of action and a good accountant, you will be prepared for whatever a lender can throw at you.