Buying a house is a goal for many of us, however the steps to get there looks slightly different as an entrepreneur or small business owner.

Enter Tori, a local BC mortgage broker and entrepreneur who has been in the finance business for 26 years. As an entrepreneur herself, she has all the tips on getting us into our first homes sooner!

1. Am I self-employed?

The first step as an entrepreneur looking to buy your first home is to know what type of entrepreneur you are; this will help direct you towards which documents you will need to collect.

These include:

  • T4 is for an employee is the simplest.
  • T4A – commission income, a type of self-employment
  • T1- Sole-proprietor – look at complete package – schedules, how many
  • sources of income you derive from business(es)
  • T2- Incorporation documentation
  • T5 – business that pays dividends

2. Get Pre-qualified (10:55 – 18:30)

After sorting out your entrepreneur type and corresponding tax form, the next step for purchasing a home is to get pre-qualified. A mortgage broker can help to guide you through this process.

Unfortunately, there is no magic number for how much you qualify for. Lenders will look at your entire financial position including your income, your debt, and your assets. A good first step is to set-up a discovery call with a mortgage broker. This will help determine when you will be ready to start looking for your dream home! Along with knowing how much you can borrow, you will also need to determine how you will cover the down payment (equity from savings or a combo of a gift from a family member).

3. What does a Lender Look at for self-employed borrowers? (19:08 – 24:30)

For entrepreneurs buying a home, a lender will review your average net income as per your two most recent tax returns. They will often use the lower net income, especially if there is a significant variance between year 1 and year 2.

If you are lucky enough to be receiving help from family, the lender will take into consideration their debt and equity.

Lastly, if your business is incorporated you may need to provide financial statements prepared by an accountant, articles of incorporation and 6-month of business banking statements. (33:07-33:28)

4. The Stress Test (25:33 – 28:33)

The stress test is criteria a lender can use to ensure you have sufficient funds available to meet your loan repayments without putting you in a stressed financial position. Tori highlights the hurdle of the stress test for aspiring homeowners as:

  • Not more than 39% of your net income can go towards servicing your dwelling cost, property cost, strata, and a nominal heat fee.

In combination with the stress test, lenders will also look at your debt-to-income ratio. This is based on a stress test rate of 5.25% of the amount you want to borrow over a 25-year amortization period. This is not based on the contract rate (2.34%), so it prevents you from over-extending yourself. (28:09)

5. Putting it all together: (32:04 – 45:15)

It all starts with the deposit, which can be anywhere from 5% and up. If the property you are purchasing has an investment quality to it (e.g. rental), this is upwards to 20%. (32:35)

Of course, this isn’t all. Some key points entrepreneurs must consider are:

  • Self-employed people must show two years of tax returns (T1 Generals).
  • If you are not a sole-proprietor, you need to show articles of incorporation, financial statements from your accountant, and 6-month of business banking statements. (33:07-33:28)
  • If you have any other debt in your name this will be included, for example a car loan in your name. (34:20)

Tori’s best pieces of advice with the mortgage qualification process are:

  • Trust your gut. Don’t walk away with more questions than you came in with. (44:59-45:15)
  • Start before you are ready.
  • Get educated and start saving. (47:20)

Show notes: