Why is it So Hard for the Self-Employed to get a Canada Mortgage?

Last month we kicked off our first mini-series with a close look at closing costs. This month, we explore another question that is at the front of Canadians’ minds: why is it so hard to get a Canada mortgage when you’re self-employed? In this first part of our mini-series, we’ll look at the reasons why the self-employed often have a hard time getting a mortgage; then, further on in the series, we’ll tell you about the options you have when you’re self-employed!
Twenty years ago, the amount of self-employed people in Canada sat at a minute 8% – of our entire population. Then the recession hit in 2008, people lost their jobs, and were forced to turn elsewhere for their income. Enter the generation of entrepreneurs! After 2008, the number of self-employed has more than doubled, now sitting at 20%. While that spells good news for our economy and shows just how ambitious and driven Canadians are, it’s left one very big problem – 20% of people are now having a very hard time getting a Canada mortgage, all because they’re self-employed!
But why is that? Why are self-employed people looked upon so differently than those who have an actual employer and receive a paycheque signed by someone else every two weeks? The biggest reason is actually the lack of those paycheques.
One of the things that lenders and banks look at most when approving home loans is the ability of the applicant to pay it back. When a person has an employer, they can easily bring in pay stubs, income tax forms, and other paperwork that verifies their income. However when you’re self-employed, you probably don’t have pay stubs, and the amount of money you make in a month could vary – something that lenders see as being very risky.
When you’re self-employed, the other thing banks and lenders will look at is the history of the business. Naturally, lenders believe that businesses that have been around for a little while (longer than 2 years) are going to be more stable, and most likely be around for the next several years. However, new businesses are one of the riskiest gambles for anyone – the owner of the business, customers and yes, lenders too. It’s a sad fact but, the majority of new businesses in Canada fail; and lenders just don’t want to take the chance that your main source of income will dissolve in a few months time.
Depressed yet? Don’t be. It is harder to get a Canada mortgage when you’re self-employed, but that doesn’t mean that it’s impossible – and that’s just what this miniseries is for! To outline all the different ways self-employed individuals can obtain a mortgage, and tell you what you need in order to get one! Come back on Monday, when we’ll explore the most popular way for self-employed Canadians to obtain a mortgage – the Stated Income Mortgage.