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According to research by LIMC, up to 16% of the Canadian workforce is self-employed, within which 73% of entrepreneurs work independently. For self-employed Canadians looking for ways to turn their home-buying dreams into reality, this article by Dominion Lending Centres provides the steps for navigating the process of mortgage and homeownership.
Plan for Homeownership Costs
Buying a house is a long-term responsibility that will serve as a recurring cost for the foreseeable future. As reported by the Government of Canada, here are a few criteria’s borrowers should be aware of:
- TDS Ratio: The total debt load is calculated by dividing your gross monthly income by the sum of monthly housing costs and other debt payments. A ratio of 44% or less is considered ideal.
- GDS Ratio: Calculate your gross debt service ratio by adding all monthly housing costs and dividing it by your gross monthly income. Work to keep your GDS ratio at 39% or lower.
Gather Required Documents
Before connecting with a lender take the time to obtain the following documents:
- A copy of Articles of Incorporation (if you are incorporated).
- Proof of you being the principal owner of the business, as well as proper documentation of your income from your business.
- Notices of Assessment for at least the past 2 years. If you are newly self-employed, you may be eligible for an exemption.
- Your personal and business credit reports. A score above 650 will help to make a good impression on the lender.
- Past and current financial statements, in addition to any contracts showing expected future income.
- Proof of payment for HST/GST.
Applying for a Mortgage
Once you have gathered the required documents, approach the lender of your choice and submit a mortgage application. Expect to face one of these two situations:
- If you can provide proof of income and put forth a 20% down payment, you’ll avoid having to pay an insurance premium on your mortgage.
- If the lender isn’t satisfied with your proof of income, you’ll be required to pay at least a 10% down payment and be charged a premium between 6–4%.
Additionally, the income you declare on line 150 of your T1 tax return for the past 2-3 years will be used to calculate the eligible mortgage amount. Hence, be mindful of how much income you repay yourself from your business revenue.
For self-employed individuals, proving their financial stability to lenders is key for being accepted for a mortgage.
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