Self-employed face tougher rules when buying homes

TORONTO – Cameron Klem, a business owner in the construction industry, is looking to sell his home in Edmonton and buy a new one closer to the school his fiancee, a teacher, has been transferred to.

But despite a solid credit score, “huge revenue” and having been in business for seven years, Klem is having trouble securing a mortgage.

“It’s a pain,” says Klem. “It makes me ask myself if being self-employed is even really worth it when you have to go through this much trouble.”

Experts say lenders have become more stringent when it comes to providing mortgages to the self-employed, which could leave business owners shelling out more money to the taxman in order to prove their incomes.

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“Rule changes over the past six or seven years have dramatically limited the ability of self-employed people to get mortgages,” says Chad Oyhenart, a Vancouver-based mortgage broker at Dominion Lending Centres.

“It’s become quite a bit tougher on them.”

Oyhenart says lenders are tightening the rules because of mounting fears that the country’s housing market is overvalued.

“They just want to make sure that they’re not putting Canadians into situations that they can’t get out of, so that we don’t end up being the U.S.,” Oyhenart said, referring to the U.S. subprime-mortgage crisis of 2008 that saw a slew of mortgage defaults and foreclosures as housing prices crashed.

Jeff Mark, co-founder of broker Spin Mortgage, says previous regulations were simply too loose.

“There were probably a lot of borrowers and brokers alike abusing the system, and probably defaults too, I would imagine,” says Mark.

The rule-tightening comes at a time when the number of Canadians working for themselves is steadily on the rise, growing to roughly 2.7 million in 2014, according to Statistics Canada. That’s an increase of more than 10 per cent over the past decade.

Oyhenart says self-employed mortgage borrowers are being required to put down larger down payments, show more documentation to prove their businesses are sound and have exceptional credit scores.

A certificate of incorporation, three years of financial reports prepared by an accountant and two years of personal tax returns are typically required.

And it isn’t just the big banks that are tightening their purse strings, Oyhenart adds.

“We’re even seeing credit unions take on some additional regulation changes as well.”

Stricter rules could force borrowers who run their own businesses to write off fewer expenses or pay themselves higher incomes in order to demonstrate their ability to meet mortgage obligations, says Mark. That could lead to larger tax obligations, he adds.

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“There is an incentive to write your income down to reduce your taxes down when you’re self-employed,” says Mark. “But if people are planning a purchase, and planning to take on a mortgage, they might have to report more income for a few years.”

There could be some ways around the greater tax burden, says Oyhenart.

“If you’re the owner of an incorporated company you can pay yourself dividend income, so your personal taxes are lower, but at least it’s giving you income on paper that looks to be higher,” he says.

Experts say it all comes down to proper planning.

“It’s now got to be a two- or a three-year plan for self-employed people to get a house,” Oyhenart says, adding that business owners would need to demonstrate higher income on their tax returns for several years prior to purchasing a home.