Being Self Employed
While it comes with a lot of hard work, there are so many benefits of being self-employed. Many people aspire to open up their own business, doing what they love, and it takes a lot of effort and confidence to do just that. In addition to being in control of your schedule and salary, there are plenty of monetary benefits come tax season. Below, find out what could stand in your way of getting approved for home financing, and how a mortgage broker can improve those chances.
Possible Financing Roadblocks
Although more and more people are making the change to a self-employed lifestyle, most lending sources still tend to favour standard salaried employees when it comes to financing. With a standard employee who has worked a steady job for a number of years, the lender can count on that loan being paid back steadily over time.
In contrast, a self-employed individual may earn more money than a standard employee, but the bank will wonder, how stable is that income? When a lender receives a loan application from a nurse for example, they can feel confident that if that nurse lost his or her job, they could easily be employed somewhere else, receiving the same level of income. But for a self-employed business owner, there is much less of a guarantee.
Requirements for Getting a Mortgage Approved
In order to get a mortgage loan approved, the business owner will need to prove their income to the lender. This can be more difficult than it sounds! Unlike a salaried employee, self-employed small business owners generally do not receive T4s during tax season – one of the main documents a lender will request when reviewing a mortgage application.
The second thing that makes proving income difficult for small business owners, are tax write offs. Come tax season, write offs are and excellent way to save a lot of money. Being able to write expenses off and pay less taxes is one of the biggest benefits of being self-employed! However, by writing off lots of expenses, on paper, the business owner’s income is significantly lower than what they really earned. When you’re applying for a loan, the last thing a business owner wants a lender to think is that they don’t have a lot of income.
As a small business owner, the two best ways you can ensure you’ll meet the lender’s approval requirements are to 1. Plan Ahead and 2. Work with an experienced mortgage expert.
At least two years before you think you’ll be ready to purchase a home is when to start working with your accountant. This is because when you apply for a mortgage loan, the lender is going to be looking at your last two years of financial data. When you share your plans with your accountant, they can strategically do you taxes. By this we mean for the two years leading up to your anticipated home purchase, your accountant will write off less expenses that you would technically be eligible for. Unfortunately yes, for those two years you’ll be required to pay more taxes, but in the end it will be worth it. The extra amount of taxes you’ll pay for two years could seem miniscule compared to the increased loan amount you will be eligible for, by reporting a higher income.
Benefits of Working with an Expert for Home Financing
As soon as you’re thinking about becoming a home owner (even if you’re a few years away) it’s highly recommended that you speak with a mortgage broker. While you could walk into your local bank branch and ask for a mortgage, the chances are fairly high that even if you do get approved, the mortgage product they have won’t be an ideal fit.
A mortgage broker has access to over 40 different banks and lenders (not just one or two!). By tapping into their large network, a mortgage broker is able to review all mortgage products currently available. Some of their lenders with extremely competitive rates are not even accessible on the consumer level! A mortgage broker will review your unique situation, and shop mortgage products on your behalf, presenting you with only the best possible options. This improves your chances of getting approved, and can often save you a lot of money!