How freelance workers can actually get a mortgage

It is a truth nationally acknowledged that housing prices in major Canadian cities are insane. It's bad enough trying to buy when you have a steady salary, but when you're a freelancer or sole proprietor, it can seem insurmountable.

Federal Finance Minister Bill Morneau commented that Canadians should get used to what he called "job churn" or short-term employment and a high career turnover. With employment precariousness, how can a sole proprietor afford a home?  

Conversations with freelance friends, often over a glass of wine, followed a certain pattern. One friend, who asked to remain anonymous, said that she wasn't sure she could even get a mortgage since she didn't get a regular, bi-weekly paycheque and couldn't produce a letter from her employers.

It's not impossible, says Shannon Lee Simmons, founder of the financial planning firm New School of Finance. "They just have more hoops and barrels to jump through." She says that freelancers just have to show more financial information than people who are traditionally employed.

"If you've just started your business two years ago and now it's running well, you will still have to show that old history that maybe doesn't show a great income. Also, the income showing on your NOA (Notice of Assessment) is after expenses for your business. It's not based on revenue. I often tell my sole-proprietor clients to keep this in mind at tax time. It's not always a race to the bottom for deductions and a low tax bill. Paying taxes and having a higher income at tax time is good for your personal finances."

Scott Walker, a mortgage agent and founder partner of Denova Group, agrees that sole proprietors can buy homes. "We work with a wide spectrum of lenders," he says. "And those lenders have different underwriting policies. Some are good with working for business owners, some aren't as good."

The big banks do have mortgage options for sole proprietors, but before you apply, Walker says that part of a sole proprietor's mortgage application is getting their taxes and relevant paperwork in order.

"They're looking for the consistency of work, the consistency of income and what they can put together to help illustrate what income looks like for the previous year and the year before, and they want to average that out and figure out what kind of income someone that maybe doesn't have the same employer time over time."

He says that there's a need for education for business owners, especially when it comes to deductions, which Walker and Simmons agree on. One of the benefits of being a sole proprietor is deductions of work-related tools and materials. The natural action is to claim as many deductions as possible, but that can work against you in your mortgage application.

"It's one of those scenarios where from a bank's perspective, a lot of them will look at your net income, line 150 on your Notice of Assessment. They're looking at your net income and they take a two-year average because a lot of people who are self-employed, they might not be consistent so they try to average it out."

P, who also asked to remain anonymous, recently applied for a mortgage and found herself in a mass of paperwork, questions and explanations. Her lender requested samples of her invoices and "combed through my bank statements," she said. She says that she does a lot of 'one-off' freelance work and found herself having to explain how freelance worked to her lender.

"They would say, 'you have a deposit of $5,000' and I would have to explain to them that was because I would deposit all my cheques at once and that would be over a period of a few months and this wasn't a regular thing." She did get her mortgage, but described the process as "a pain in the ass."

Walker says a way to smooth out this process is start communicating with your bank or broker as early as possible so you can start planning. "What price point are you looking at and what steps you should take to file appropriately so you can afford that home, that would solve a lot of problems, as opposed to what most people do which is, 'Here's my net income, I deducted as much as possible, paid limited taxes and now I want to buy a house.'"

Do you have experience trying to get a mortgage as a freelance worker or business owner? Let us know on our Facebook page.