Four mistakes self-employed borrowers make and how to avoid them.
Four mistakes that can ruin your plans and how to avoid them.
There may be other pitfalls that can get in the way of owning property in Canada when you’re self-employed, but these are the four most common ones.
1. Not doing enough research.
Every industry has its own terms, and real estate (especially the financial side) is no exception. This is why it’s paramount to do your research and make sure you understand the jargon and technical terms before you start looking.
How to avoid it.
Find reliable sources that are representative of the Canadian real estate market, like REW’s Suburban Dictionary, and ask experts you trust whenever something isn’t completely clear.
2. Taking The DIY Route
Many self-employed individuals are used to tackling challenges head-on, but buying a home and securing a mortgage can be a bit too much even for the scrappiest DIYers. It can be done, but unless you have advanced knowledge of the market and financing sources, it exposes you to many pitfalls.
How to avoid it.
Talk to an experienced mortgage broker who knows the market and can provide information and guidance on both funding and the real estate market. They can also help you get your documentation in order, so your financing request will go through without a hitch.
3. The pre-qualification vs. pre-approval dilemma.
These terms are often used interchangeably by the general public, but if you want to be a homeowner, you'd better know the difference.
Pre-qualification: You tell the bank what you make; they tell you what you might get (no background checks at all). This so-called evaluation is closer to a New Year's resolution than to getting your funding request approved, though.
Pre-approval: The lender performs a credit check and locks in an interest rate for a determined period of time. Recently, many lenders (like BMO and TD) have extended these locks to 120 or even 150 days.
How to avoid it.
Know that getting pre-approved trumps being pre-qualified. However, be aware that, until you’re actually approved, there’s no complete guarantee you’ll get the amount you need. That’s because lenders typically don't fully verify your self-employed income until you actually find a home and submit a live application.
4. Not getting their funds in order.
Self-employed borrowers who are immigrants may want to use funds from overseas for their down payment. This is not wrong, but lenders (and the CRA/FINTRAC) are notoriously skeptical of large overseas transfers.
Things get even more “worrisome” for lenders when these funds come from a self-employed individual’s business accounts. So, if you don’t want your mortgage application to be stalled, it’s best to sort your funds in advance.
How to avoid it.
Move the money into a Canadian bank account at least 90 days before you apply. This significantly reduces the paperwork burden. Also, if the overseas funds are a gift from a relative, you will need a Gift Letter signed by the donor. Note that some lenders require the donor to provide their own bank statements to prove they actually had the money to give.
In summary.
While it’s true that self-employed borrowers have it rougher, they are not left out of getting a home or investing in real estate. If you’re interested, do your research, talk with the right experts and make sure all your papers and funds are in order.