For some Canadians who are self-employed, their situation is the consequence of corporate downsizing. For others, it is a carefully planned decision to leverage their knowledge and experience for themselves and improve their own bottom line.
Typically a very innovative and energetic bunch, the self-employed now comprise approximately 15% of Canada’s total workforce. We like to imagine that these are the lucky folks who are living their entrepreneurial dreams.
But talk to self-employed Canadians about getting financing for their new home and many will tell you that the dream can have downsides. These individuals – who may actually be more financially successful than ever – often do not fit traditional lending criteria. It can make shopping for financing a frustrating experience.
Without an established stream of pay stubs from an employer, lenders have none of the traditional assurances that you can meet your financing obligations. You may be expected to undergo a long and complicated process to prove your ability to service your debt. Lenders want to verify your employment and your income – not a simple task for someone who is self-employed. Lenders are also looking ahead; they will want some evidence that payments can be made for the life of the mortgage – not just over the next year.
Most frustrating of all, small business owners are usually expected to provide detailed financial statements for their business for the past two years. And what picture do those statements paint for the lenders? An astute business owner with a good accountant will work hard to minimize taxable income for the business: a smart financial management strategy. But when lenders plug those figures into their lending formulas – they may conclude that you are a high-risk borrower.
The problem is not with the self-employed as a category; it is with lenders’ traditional criteria, and their inability to reflect the different income environment of a self-employed homebuyer.
Thankfully, the lending landscape has adapted to this market need. You could qualify for your financing based solely on what you state your income to be, and after confirmation that your lending ratios, credit and tax liabilities are in good order. It can be that quick, that easy!
For the self-employed – who build their own success on understanding the needs of their customers – the new financing programs designed for them are good business. And they’re also welcome news to the growing number of Canadians who are building their own success in their own way.