An entrepreneur’s guide to qualifying for a mortgage

According to Entrepreneur.com, millennials are the “fastest-growing segment of entrepreneurs in our economy.” With creative and tech industries booming, it seems like there are new innovative startups popping up every day. What does this mean for the future of homeownership? How is qualifying for a mortgage different for an entrepreneur?

When the average person goes to the bank to get pre-approved or to apply for a mortgage, they bring two paycheques, maybe a T4, and some photo ID. Some banks may require a letter from your employer stating your current salary and length of employment. You also need to be prepared to discuss your assets and liabilities.

Let’s see how this process changes when you own your own business:

So, if you own your business, you are self-employed, so you don’t have to worry about that letter from an employer. But, you can’t simply bring in two paycheques that you issued to yourself.

You need to bring two years of personal income tax returns and two years of corporate taxes. Here’s where things get complicated.

Most major banks don’t care if your business is worth thousand or millions, they will only judge you based on your salary. Like many entrepreneurs who own small businesses, you are likely keeping a significant amount of money in the company to support growth. If you’re only paying yourself $30,000 a year, then that’s all the bank will take into consideration. The corporate taxes and financial statements are simply used to judge whether or not your income is stable.

You see, you’re a risk. The bank doesn’t want to go through the trouble of taking your home if you default on your mortgage; they want you to be able to pay for as long as possible. And even though you may have access to a large sum of money in your business, the bank doesn’t see it that way.

So, what’s the solution? Wait a year and pay yourself more so you can qualify for your desired mortgage? That won’t work, and here’s why; if you make $30,000 in 2016 and $70,000 in 2017, the bank is going to add the two and take the average, which would only be $50,000. So, if you decide to pay yourself more and play the waiting game, you need to wait at least two years.

It’s interesting that major banks do this because if you brought them personal taxes that showed that you made $70,000 in 2015 and only $30,000 in 2016, you think they’re going to add them together and get an average? Nope, they’ll only consider the most recent year if it happens to be lower than the previous year. The major banks will always act in their best interest, and that’s actually a good thing, because it prevents you from taking on a larger mortgage than you can handle.

Another option would be to keep socking away money slowly for a larger down payment without increasing your salary. That way, you don’t have to qualify for a large mortgage. That said, saving for a down payment is one of the most difficult parts about buying a home for most millennials. But, if you find yourself in the unique situation of having over $100,000 to put down, then go for it.

The quickest solution would be to go to a broker. Remember how the banks won’t consider your business’ money as your money? Well, brokers are more open to speculation. A broker might look at your $30,000 salary and $200,000 in the business and approve you for more than the bank did.

But, expect to pay higher rates and in the long run, pay more money. A smart thing to do would be to visit a broker and see what kind of a mortgage they’d give you and have them explain why. Then take those numbers and explanation to your bank and lay it out for them. There’s a (very) small chance that the bank will review and adjust your max amount. Even if they only give you a little bump up, it could help you afford your dream home.

If you own your own business and you’re confident enough to start shopping around for your first home, then consider yourself a winner already. Running a business is one of the biggest challenges you can undertake and attempting to enter Toronto‘s hot real estate market is another one of the biggest.  

It’s exciting to see so many entrepreneurs supporting our economy and we’re hoping that this brief guide helps you navigate the process of qualifying for a mortgage.