How To Qualify For A Mortgage As An Independent Contractor?

This information is going to be most valuable to independent contractors, self-employed individuals, sole proprietors and entrepreneurs.  I use the word “corporation” quite frequently in this post.  You can interchange sole proprietor with corporation.

If you’re an employee looking for a Mortgage, you might visit a different page on my site with more relevant Mortgage qualifying information for you there.

Independent Contractor Mortgage Qualifying: Income.

For whatever reason, or benefit (yours or the employers benefit), you’re earning an income as a independent contractor now.

The one big challenge with this kind of income structure, especially related to purchasing a home, is typically lower personal income.

Here’s what typically happens:

• Money is earned by the independent contractor (sales or revenue) and deposited into a corporate bank account.
  • This is corporate income.
  • What’s great is this income is subject to corporate income tax which is MUCH LOWER than personal income tax.
  • You can also spend pre-tax dollars as business expenses (meals, supplies, fuel etc).
• Personal money is earned by the corporate owners (President etc) usually in the form of dividends.
  • This is money you personally spend in your life (all non business write offs).

For many people, it usually makes sense to retain more income (sales or revenue) earned in the corporation versus creating high personal income.  Why?  Because the combined Provincial and Federal corporate income tax is about 12% …on any amount of income!!  It’s a flat rate tax.

As you know, personal income tax brackets are tiered.  The more personal income I earn, the more income tax I pay.  This can be particularly punishing (re: expensive) at the upper personal tax brackets for Canadians.

So, many people come to the realization (one major benefit of being an independent contractor) is to retain money in their corporation, sheltering it from personal income tax.

Until they realize that low personal income is a hurdle when qualifying for a Mortgage …

How To Qualify For A Mortgage Using Corporate Income?

There are Mortgage lenders willing to look at corporate income when qualifying for a Mortgage.

Here’s what I typically need to see to verify corporate income:

1. 3-6 months of corporate bank statements.  This verifies deposits (income) into your corporation.
2. Corresponding invoices of services rendered may also be requested.
3. Proof of self employment – corporation certificates.

The income earned over a short amount of time is extrapolated into an annual income for Mortgage qualifying.  If your business is seasonal, we might want to look at 12 months of Bank statements to arrive at your annual corporate income.

Honestly, arriving at a corporate income is this easy!

Independent Contractor Mortgage Down Payment:

Here’s the rub in all of this …to access Mortgage lenders willing to look at non-traditional income qualifying (above), they require at least 20% down payment (possibly more depending on the property type and purpose of home).

Down payment for a home, might be sourced in the following ways:

1.  Personal savings, RRSP, TFSA, stocks/bonds/mutual funds etc.
2. Corporate savings.
3. Gift from immediate family.

If you’re bringing money in from overseas, please connect with me personally about creating a strategy around this event.  An easy rule-of-thumb, for money coming into Canada, is money needs to be in a Canadian bank account for 90 days.

Other creative ideas for sourcing down payment money is borrowing it as debt or creating an RRSP loan.  Again, the more creative the down payment verification is, more planning is required.  Please connect with me personally to help structure this with you.

Personal Credit: It’s Still Important

Regardless of how your income or down payment is structured, your personal credit is a major pillar in supporting the approval of your Mortgage application.

The simple fundamental knowledge to improve your credit score is this:

1. Make at least your minimum Mortgage payment on-time.
2. Maintain low credit balances, ideally 50% or less of your credit limit.

These two items make account for about 65% of your TOTAL credit score.  Like most things in my life, take care of the “big” items first.  Pay my bills on time and keep my balances low.

Overall, Canadian Mortgages are moving toward risk-based-pricing (FYI – the term “pricing” in Mortgage land is referred to as “interest rate”).

Let’s talk about interest rates now …

Independent Contractor Mortgage Qualifying: Interest Rates.

Higher risk equals a higher interest rate (remember, this is classified as non-traditional income qualifying and garners higher associated risk).

With non-traditional income Mortgage qualifying the tiers to this kind of interest rate quoting are a moving target at best.  Many factors of the Mortgage application also considered when arriving at an interest rate (tenure of employment, experience in industry, down payment percentage, location of property, property use etc).

The bottom line is, having a strong credit score is helpful to accessing fair interest rates.  That said, I also have solutions for lower credit scores.  Please understand this might require additional down payment to further offset the risk of lower credit.

Solutions To A Problem!

These lenders are not “loan-sharks” or some group of unscrupulous bandits lurking in the shadows ready to prey on the weak.  Not the case.

I think these lenders are serving a niche in the Market, for a mutual benefit.

With traditional down payment and a good credit score, Mortgage interest rates for non-traditional income qualifying applicants is about 0.30% – 0.50% higher than traditional income verified Mortgage applicants.

Think about it.  You might be saving THOUSANDS of dollars by retaining money in your corporation, sheltering it from personal income tax.  And in turn, you might be paying 0.30% – 0.50% in Mortgage interest rate.

When applicable, I usually suggest this kind of initial solution be for a short term Mortgage.  This will allow you time to restructure your personal income, should that be the direction you want to take.

Having this short-term Mortgage come up for renewal, also avoids any Mortgage penalties when switching to a Mortgage lender offering market interest rates with traditional income qualifying.

I hope you’re seeing the benefits here to a common problem in the market!

Here’s What To Do Next:

I guess this is where I shamelessly request you contact me.

Please do not be shy about connecting with me if you’re 6-12 months away from purchasing.

Email: chad@canadamortgagedirect.com

Direct phone: 403-809-5447

Talk soon,

Chad Moore