Alison's Money Rule

It can be challenging for the self-employed to get a mortgage but ship-shape finances will put you on same footing as the average working stiff.

Self-employed mortgage woes

February 16, 2010

It was a sad day when I sold my 1971 avocado-hued, Karmann Ghia. Oh sure, this ‘sports car of the people’ didn’t have the power or handling of its richer cousin, the Porsche. But it was a sexy number for a freelance writer to bomb around the streets of Vancouver.

Therein lay the problem -- freelance writer, i.e. self-employed, ergo a bad credit risk. Though I supplicated myself trying to borrow $4,000 to buy a first computer, my little, green beauty ended up financing my technology upgrade.

Later I hoped for better luck with a mortgage. I had 30 percent saved but when the loans officers saw my income tax return they couldn’t show me the door quickly enough.

The banks only took into account taxable income while I, like most self-employed, had many more deductions, such as use of home and auto, to lower that figure. Even with a hefty gross income, the self-employed have historically come up short as credit worthy.

But that’s changing, according to mortgage agent Dianne Chafe with Oriana Financial in Toronto. “Financial institutions are more and more willing to look at gross income,” she says. “If your finances are in good shape you should able to get as good a rate as an employed person.”

Here are four tips to ensure that the phrase “self-employed homeowner” isn’t an oxymoron for you.

1. Aim for 20 to 25 percent down to reduce debt load and avoid expensive mortgage insurance.

2. Be able to prove you have been in business for at least two years. The easiest way to do this is to register your business. Check out www.canadabusiness.ca/eng/guide/1282/.

3. Do a credit check on yourself to make sure there are no surprises lurking.

4. Even though some lenders will take into account gross income (assuming your financial nose is sparkling clean), keep your total debt servicing -- mortgage, condo fees, property tax, utilities and non-mortgage debt -- as close as possible to 40 to 44 percent of your net income.

If you work for yourself, follow these tips for a successful mortgage hunting experience.