Over the past few months a new trend has seem to have emerged. Many trades-people have been pouring in applying for mortgages; however, many of them are now subcontracting as opposed to working for said employer. What does this mean exactly and what does it take for them to buy a home?
Firstly, this now means that this client is self-employed and responsible for his/her own income taxes, workers’ compensation and benefits. As attractive as the extra income is to you, as they’ll likely pay a few more dollars an hour, it also means that you will have extra costs as you are now running a business and have now taken on more responsibilities and liabilities.
Self-employment is like ‘Jekyl and Hyde’, on one side you can make a lot more money and have more freedoms but on the other side is a level of risk and responsibility you may not be prepared for as lenders aren’t too fond of the self-employed these days, and rightfully so. We are in the highest category for mortgage delinquency and defaults, meaning we are the most likely to not pay for a mortgage. Mortgage delinquency for the newly self-employed (one to four years) individuals is three to five times higher than any employed individual.
The mortgage insurer rules for the self-employed have changed dramatically over the past few years and it’s difficult to keep up as each lender has their own criteria for qualifying as well. There too many rules to list but I can cut them down to a couple simple rules (and there are exceptions to these) to start. They want to see a minimum of two years of self-employment with two years of financial statements completed and up-to-date personal taxes with great credit and depending on your debts, you’ll need be between 5 and 10% down payment from your own saved up funds.
The lenders and mortgage insurers need to see that you are capable of paying your own taxes in a timely manner and are able to responsibly manage your income and debts.
For example, if you are a journeyman welder with two years of self-employment and have all of your taxes up to date along with paying yourself a good wage from your earnings then all should be ok. However, if you deviate from one of the above, let’s that you have great credit, but haven’t done your taxes in two years and even have 10 – 20%for a down payment, you won’t likely be able to buy a home until your accountant has completed and filed all of your paperwork and you’ve paid all of your taxes.
As of late, I’ve had many applying to buy homes that are quite outside the box of being able to qualify, but many don’t seem to fully understand what they are getting themselves into with regards to self-employment.
Contractors would prefer to hire sub-contractors for a few different reasons; the following are the main ones: less administration, less source deductions (you pay your own taxes), no workers compensation, no benefits and also less labour laws to deal with. So before you leap into sub-contracting ensure you understand everything you are getting yourself into.
So do the benefits outweigh the risk? Of course they can, but one has to look hard into the mirror and ask themselves the hard question: Am I organized enough to handle all of the aspects of being self-employed? Is now the right time? Should I get more established before delving deeply into this? Do I have enough saved up to live without working for three to six months?
Being self-employed can be very rewarding, but I’ve also seen many disasters happen because of it. The best advice I can provide is preparedness. Do the research so that you know you are getting into the right situation for you and your family and lastly, expect to put some things on hold for the first couple of years until you have a couple of tax seasons behind you.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres-Regional Mortgage Group and can be contacted for questions or appointments at 403-391-2552 or emailed to jturcotte@regionalmortgage.ca.
