Working for Yourself
Posted on October 3rd, 2012
A survey from the Canadian Federation of Independent Businesses indicates that for the first time in 4 months, “small businesses report higher levels of optimism.” The report from CKNW notes that while scores from 65-75 point to a growing economy, BC’s score rose from 56.4 in August to 59 in October, and that this reflects a similar trend across the country. It’s been clear for some time now that small businesses and self employment are more popular career choices than ever before, and while being your own boss comes with unique challenges and costs, there is no denying the appeal. New Westminster itself is home to many small businesses, and in fact, it’s one of the things that I most enjoy about the city. I could go on about the mix of independent and chain business and their locations in New West, but what I would really like to address is what to expect if you are working for yourself (also known as “business for self” or BFS) and you need to get a mortgage.
Where do you start?
If currently have a mortgage that you got while you were working at a regularly paying job, then you will likely be given a renewal offer by your lender when your mortgage maturity date comes up (i.e. the end of the term you initially agreed to, usually 5 years). This will be based on what they are currently offering for rates, though little else will change. Accepting a renewal offer usually means the lender does not re-qualify you; they don’t ask again for your pay stub or job letter or check your credit, as they assume if you’ve been making all your payments that you’re in the same financial situation as when your relationship began. However, if you are now BFS and want to switch to a new lender or you are getting an entirely new mortgage, then there are some pieces of information that it’s important to know.
Most lenders, if they are to give you their best available rate, want to see 2 years of employment. This goes for regular jobs as well, though there are exceptions for if you’ve just started at a new company but have been in the industry for many years, or you have just left school and begun working in a related field to your studies. The same goes for self-employed individuals. The difference is in how they calculate your yearly income. With a regular employee, the most recent year’s income can be used. For self-employed borrowers, however, a two-year average, taken from T4s or notices of assessment, is used (this is also how lenders will calculate and verify part-time work). In addition, lenders will usually want to see proof of business for self in the form of the business’s articles of incorporation or accountant-prepared T1 Generals. There are other programs available that don’t require income verification like this, however due to the increased risk to the lender, the borrower will need to pay a higher interest rate. Basically, what is most important for BFS borrowers is to have been working for themselves for at least two years, to have all tax documentation in order, and to have a realistic idea of how much money they made over those two years.
Every borrower is different
There are so many variables that can change what a particular person needs in a mortgage, so it’s fairly impossible to give universal advice. Furthermore, each lender is going to have its own standardsand requirements. In the BFS category, the requirements used to be less stringent, but as more and more people have been quitting their corporate jobs, and as the economy has struggled in other ways, lenders have tightened up their expectations for this kind of borrower. This is where a mortgage broker can really make a difference with increased knowledge of how to navigate borrowing when you’re self-employed.