The idea of quitting your 9-to-5 and working from home, a beach or on the opposite side of the world may sound like a dream, but if you ask the 4.2 million Canadians who are either temporarily employed or self-employed (without employees of their own) they might tell you it's great—until you want to put down roots.
Buying a home is often seen as a milestone towards adulthood. But as the real estate market grows, mortgage criteria has become stricter and the path to homeownership more challenging—especially if you freelance.
Intuit Canada predicts 45% of Canadians will be self-employed by 2020, so whether you freelance by choice or by circumstance, knowing the ins and outs of getting a mortgage in the gig economy could have you into your dream home in no time. Here's what you need to know:
Have all your documents ready
Before you even start looking at properties, you need to know how much you can borrow, which means you'll have to speak to a mortgage lender or a bank. The bank will look at the two most recent years' Notice of Assessment (NOA) and T1 Generals, and use either an average of the two years or the most recent year, whichever is lower.
Ramón Pérez, a freelance comic book artist based in Toronto, was rejected the first time he applied for a mortgage, even after nearly four years of self-employment. “My requests fell on deaf ears, even though I could prove to maintain a monthly rent that exceeded my monthly mortgage commitment,” he says.
This was before the mortgage stress-test that came into effect in 2018 (also known as B-20), which now requires banks to use one of two qualifying rates: the five-year benchmark rate (5.34% today) or the rate your lender negotiates with you plus 2%.
It wasn't until nearly a decade later Pérez was successful, but the path to homeownership remained rocky. “I had 15 years more experience and a higher income, but I still was given poor deals by my personal financial institution,” he says.
Most lenders are hesitant to approve a freelancer's mortgage application from the get-go — even with a high income and years of experience — so it helps to show up to your first meeting with as much proof as possible you can handle a mortgage. If you have clients on monthly retainer and you feel comfortable asking them for a letter confirming they pay you X-amount each month, it will strengthen your case in the eyes of the underwriters.
Declare your income
Many freelancers don’t declare 100% of their income, and while an extra hundred dollars here and there may not seem like a big deal, it can add up over the year. Not declaring enough of your income will hurt you when applying for a mortgage—especially now that most banks have tightened up their lending policies.
If you're planning to purchase a home shortly after starting your freelance career, it may be worth slowly transitioning from a full-time job to self-employed life rather than jumping straight into freelancing. Banks can only accept your income as stated on your NOA, so if your first year as a freelancer was slow, even if you're on track to meet your financial goals for the year, it won't make a difference to your application. You would have to wait until the following year when that income has been recorded on your NOA, to be considered for your mortgage.
Consider speaking to a broker
Even if you're approved by a bank, your income instability may get you a higher interest rate. “As a freelancer, no matter how much you make, your income looks irregular and unstable—even though in today's economy I would consider it far more stable,” Pérez says. “I would say a freelancer has to prove themselves much more and will have a harder time acquiring a comparable mortgage to an individual with a comparable income.”
Ultimately, a less-than-ideal interest rate led Pérez to seek out a mortgage broker. “When I ended up getting what I thought was a poor deal, even though the bank touted it as great, I decided to go through a broker based on the recommendation of a friend.”
The broker will work with you and explain where you need to make adjustments, if any, to increase your chances of approval and they'll negotiate with lenders on your behalf to get you the best possible interest rate.
Talk to your accountant
As soon as you've decided you want to buy a home, talk to your accountant. Tell them about your financial goals and give them an approximate timeline for when you think you'll be ready to buy. Your accountant can then begin preparing your taxes in an appropriate way to increase your chances of being approved when the time comes for your lender to submit your application.
If you have the option, you can always team up with someone you trust to either co-own the property or co-sign for you, which simply means they would help guarantee to the lender they will always get paid—if not by you, by them.
When it came time to buy his second property, Pérez opted for the former: “[B]y teaming up with a friend on the investment property—a friend who looked “better” on paper in the bank's eyes—the second mortgage went much smoother.”
If you're not quite ready to buy a home with your (full-time-employed) significant other but think you'd eventually like to, it may be worth it to hold off until you're both ready. Not only are two incomes better than one (and the closer you can get to your 20% down payment, the less you'll have to pay in mortgage insurance), but their income stability may get you a better term and lower interest rate.
Ultimately, if you're organized, know where to look and take the necessary steps to prove your ability to make your monthly payments, you'll be in your new home and adulting like a pro in no time.
The article above is for information purposes and is not financial or legal advice or a substitute for financial or legal counsel.