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Financing Considerations for the Self-Employed

Updated Wednesday, October 10, 2012
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Over the past few decades we’ve seen a combination of corporate downsizing and technological advances that have made self-employment and telecommuting more popular than ever.  With all the benefits of self-employment, it’s no wonder that people jump at the chance to operate from a home office and shed the shackles of the daily corporate grind. 

When approaching your bank for a mortgage, however, many self-employed buyers find that banks are not quite as appreciative of their self-employed status.   Banks need to safeguard their investment, which means that when it comes to lending they are primarily looking for stable, salaried employees with an established work history. 

It’s far simpler for a bank to verify the annual earnings of an employee with a stable paycheque than it is for them to project the income of an entrepreneur or freelance client.  While credit history is relatively easy to check up on, your venture may be less predictable as far as revenue than the steady income you would have received working as an employee over the past ten years. 

As a result, self-employed workers tend to have a harder time obtaining financing.  Some of the most important issues that confront borrowers in this position are:

Low Net Income

While reducing your income tax by deducting business expenses is one of the most prevalent advantages of self-employment, the practice can wreak havoc on your ability to show an adequate net income in the eyes of your bank.  Whether you are applying for a fresh mortgage or refinancing your home, your net income is often the bottom line when it comes to financing and it’s sure to create issues if your business income appears to just cover your expenses. 

One potential way of dealing with this situation is to use some of the money you’ve saved on taxes toward a larger down payment.  Quite often the bank will tend to feel more at ease if you are able to put down more money up front and you’ll also have the advantage of a lower monthly payment.  Another option is to hire an accountant to find ways to write off part of your mortgage payments, which may help the bank see you in a more favorable light. 

Unpredictable Cash Flow

Cash flow can be an issue with many types of business, and if your revenue is irregular or unpredictable it can make it difficult to document a normal pay schedule.  In this case, history is on your side as long as you are able to demonstrate that despite your irregular pay intervals you have managed to consistently maintain your lifestyle.  Your credit rating is key in being able to show that you are capable of paying your bills and expenses and credit rating is particularly important for those who are self-employed.  You will also benefit from planning to keep some cash on reserve in order to help you over any rough patches.  Showing the bank you have these things under control will go a long way toward helping you obtain financing. 

Irregular Work History

If your business is relatively new it can pose an obvious threat to your ability to show a regular work history.  Unfortunately now that your status is self-employed, any work history you built up for an employer will no longer be accepted as relevant by the bank and it’s up to your business to prove over time that you are able to have consistent work and therefore adequate income. 

Having a spouse with a regular employment income is always a plus in this situation, but if you and your spouse are both self-employed in your new business it can make it extremely difficult to convince the bank that your new venture will be dependable enough to enable you to keep up with your payments.  Again, the bigger the down payment you can come up with the better but in any case it’s probably better to hold off until you have a year or two of verifiable revenue to approach the bank for financing. 

One of the most important things in these situations will be to try and locate a mortgage officer who specializes in working with self-employed clients.  Check with your realtor or your business banker to see if they are able to refer you to a mortgage specialist in your area who deals specifically with cases like yours. 





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Realty Executives Alison Ltd. Brokerage

Realty Executives Alison Ltd.


727 Landsdowne St. W, Suite 100

Peterborough, ON K9J 1Z2

Office: 705-749-9229

Fax: 705-750-0345