Mortgages are very common in the U.S. and Canada, yet self-employed citizens are having a tough time getting them. In Canada, a large part of the working population (20%) is self-employed or at least working part-time. Since the demographics of self-employed workers are beginning to rise, people are wondering why mortgages are becoming harder to get. Besides self-employment, even full-time workers and proper business owners don’t get mortgages. However, through this guide, you will find out everything there is to know about a mortgage.
Quick Read:
- Financial Crisis
- Self-employed mortgage terms and conditions
- Could it be discrimination?
- Things to Remember
- Documentation process for self-employed mortgages
- You may pay more for a mortgage
- Improve your chances of getting a mortgage
- Get some ‘UNIQ’ help for your mortgage if you’re self-employed
Financial Crisis
First, you must understand why banks and private companies give mortgages so sparingly. During 2007, banks and other firms increased subprime mortgage, mortgages lent to buyers who will have difficulty paying back. This is also known as predatory lending, which occurs at the origination of the loan. In simple terms, the bank convinces you into getting into a mortgage with unfair regulations. Due to excessive risk-taking what sounds like a good idea at first, turns into a nightmare for banks internationally. Large banks and holdings backed out and filed for bankruptcy during the crisis, banks like Lehman Brother Holdings.
Before the global financial crisis Lehman Brothers Banking and Holdings was the fourth-largest investment bank internationally and in the U.S. Their involvement in the subprime mortgage crisis forced them to file for bankruptcy on September 15, 2008. This is the biggest signing for bankruptcy in the history of the United States. Their signing led to other financial institutes backing off, which resulted in the development of new fiscal policies for what would’ve been the collapse of the world financial system. The incompetence of these banks caused a chain reaction that became the cause of the European debt crisis, the great recession, and the economic downturn. People will remember this crisis as the greatest economic downfall after the great depression of the 1930s.
Self-employed mortgage terms and conditions
Now that you know the reason for why banks are so hesitant to give loans, let’s take a look at the terms and conditions. The mortgage market was mostly free and had no barriers to giving away loans. This meant that people could be taking loans that they simply cannot afford. However, banks became more careful in 2008 after the financial crisis, and after 2014, certain rules and regulations changed. These new loans, titled Qualified Mortgages (QA), put away negative amortizing and interest-only loans. Moreover, lenders will also have to access whether the buyer possesses the ability to repay the loan. To find this information they may look into your records.
With that said, here are some of the terms and conditions for mortgages according to the Qualified Mortgages act:
- Risky features such as a buyer paying less than the agreed upon amount of interest to increase the overall debt or not paying the principal amount and only paying interest
- The payback period cannot exceed more than 30 years. Prior to this rule, a buyer could apply for up to a 40-year mortgage. However, this changed after the life expectancy of an average American dropped to their 70s.
- Must be one of the three following categories:
- Payment must go to a small lender who later makes the loan part of their portfolio
- The government or a government-sponsored enterprise should authorize the loan. Furthermore, the authorization can also be by the federal housing society.
- The monthly payment shouldn’t exceed 43% of the borrower’s monthly income. The payment includes the loan and all other debts pending on the buyer.
- The upfront fees and points cannot be excessive
Could it be discrimination?
People who have a steady source of income through full time or part-time jobs have a higher chance of getting mortgages. This has put self-employed future homeowners like you at a disadvantage, as the workers mentioned above can provide accurate information and documentation. Earlier in 2007, there was a new type of loan introduced by the bank. Titled self-certificate loans: these loans were to cater to freelancers or self-employed citizens. There was no tedious process and no excessive paperwork to apply for this loan. All that applicants needed was just a few application forms were there to fill. Since these mortgages were more widespread, people started abusing the system, and they earned the name “liar loans”. These loans would later become the greatest cause of the 2008 financial crisis.
Things to Remember
Nevertheless, don’t be discouraged as you can still get the loan but the process will be more tedious. If you can prove your income with the help of your Tax Notices of Investment, you can still get the loan. Traditionally, there are two types of mortgages. One, if you are only able to pay between 5% and 19%, then you have to pay a premium. Two, if you are paying 20% then there is no premium. This premium adds later to the overall payment.
Documentation process for self-employed mortgages
Now to the part where you, a self-employed worker, will face the most trouble. During the process of applying for the loan, the bank or any other financial institution will ask you for documents. Depending on the house that you are purchasing, these documents can be bank statements or proof of your family’s lineage. As strange as it may sound, they are the ones making the rules. So, if they say you have to provide it, you will have to provide it. To be precise, you will need:
- An accountant
- A healthy deposit
- Two years accounts
- Punctuality at/of work and good work ethic
- A good credit history
After receiving all the previously mentioned information, the calculations begin. Moreover, there are many things the lender will consider while doing the calculation. They will consider your average profit over the past years and your credit history. If you don’t have two years accounts, its not a problem as most banks will still offer you a loan on your business history alone. In the case of moving or relocating your mortgage lender will be able to help you.
You may pay more for a mortgage
Since you are self-employed, the bank will treat you as a high-risk entity. You will have to make a difficult choice, either drop the mortgage plan or pay a little more to secure it. This payment depends completely on the bank. They may increase your overall interest rate or charge you a lump sum. Therefore, you can decide to pay more, and you won’t regret it. Here’s why stated income loans, although banned after 2008, still exist in a different form. In return, a higher debt you can secure a mortgage, which you were otherwise not able to get.
Improve your chances of getting a mortgage
Although it may seem overwhelming at first banks are willing to help freelancers and self-employed works as well. Many banks and financial institutes are working tirelessly to aid this undermined working class. Being specific about your line of work also helps financial institutions determine a mortgage best suited to your needs. Whether you are a contractor, sole trader or company director, these have different impacts on your mortgage. Besides going through all those barriers, you can also improve your line of work to increase your chances of acceptance for the mortgage.
1. Be organized
Keep track of all your financial statements over the years. Keep all the documents such as notices of assessment, T1 generals, tax returns and financial statements ready. Keeping your taxes up to date will also help in setting up your mortgage plan. Keeping all these documents not only helps you, but it also builds confidence between you and your lender. Later on, he may give you better options at better rates.
2. Keep a good credit score
You must understand the importance of a good credit score. After the new tax laws passed last year, citizens with a bad credit score will not have access to all of the housing options. Also, you can getter better offers with a good credit score. Lenders who find that a customer has a bad credit score, they can even deny them their mortgage package. They can do it regardless of their other information being up to date and relevant.
3. Plan ahead
It is also necessary that you refer to a professional on whether or not you are ready for a debt. Is your documentation in check? How is your credit score? What is your current income? You must take all of these things into consideration. If not you can find yourself in a plan that you cannot pay and will have to pay serious consequences.
Get some ‘UNIQ’ help for your mortgage if you’re self-employed
With the current age of modern technology, help is only a click away. From professional advice about mortgages to hiring or even interviewing accountants, you can do all of this online. Since you are a self-employed worker, you need all the help you can get. Even after taking into consideration, the minutest of details you may still be able to make a mistake that is where UNIQ comes in.
UNIQ is a mortgage broker that negotiates loan agreements on behalf of their clients. Being one of the best in the field, they specialize in structured development loans, commercial finance, and residential mortgages. The foundation of their business rests in providing the best financial options to their clients. You will be receiving great individual attention from UNIQ and their experts who have experience in all forms of property finance. Their finance packages are tailor-made to suit your needs whether it is a complicated business transaction or a simple house loan. Although their base of operations is in Melbourne, you can get access to their superior help from the phone or online through a moderator. For those of you living in Melbourne, either you have the chance to go to them for expert guidance, or they can come to you to provide help.
True, it is difficult for self-employed workers to get loans after the global financial crisis. However, it is not impossible, as there are many firms and banks willing to provide loans to freelancers. By improving your credit score, you can increase your chances of getting a good offer. Alongside improving your credit score, keeping your files organized and up to date can also increase your chances of getting a good offer. You may pay more, and the documentation process may be tedious, but there is no price too great to pay for a house. In conclusion, with the right help and guidance, you can get the best mortgage offer, and UNIQ will help you all the way.
