Homeownership is the biggest investment many Canadians will ever make in their lives. It is a landmark achievement and one that keeps delivering returns in the form of security, pride of ownership and appreciating value over time .
Most Canadian families own their own home – 63% of Canadian households in 2016, according to Statistics Canada – including many people who face additional challenges in their homeownership goals, such as:
• Self-employed workers
• New Canadians
• People with bruised credit
Members of these three groups may find it harder to gain mortgage approval or to qualify for the mortgage amount they seek. Read on to learn why, and for tips on how to overcome these hurdles.
Growing numbers of Canadians are self-employed – a full 15% of all workers in 2019. Self-employed people range from gig-economy workers who drive for Uber to entrepreneurs who own a business.
A common mortgage-qualification issue they face is income verification, says Rashida Dhalla , a Toronto real estate broker with ReMax Realtron. Many self-employed workers optimize Canada Revenue Agency’s business expense allowances in order to lower their tax burden, but “excessive write-offs in order to try to pay less tax will impact them when they want to purchase property,” says Dhalla. That’s because the major banks use net income rather than gross income to calculate affordability – lower your income too much, and you may disqualify yourself from the mortgage you want.
Try these tips from Dhalla:
• Save aggressively for your down payment: “Put a minimum of 20% down, if not more,” she says.
• Be realistic about your income: “Base your purchase [budget] on your average income for the past three years, not your highest income,” says Dhalla.
• “Meet with a seasoned mortgage broker versus a conventional bank. A broker will have more options” and lenders to choose from, says Dhalla, including those who will factor gross income rather than net income alone in their approval process.
One of the biggest newcomer hurdles can be a lack of Canadian credit, says Michelle Pommells, CEO of the non-profit Credit Counselling Canada .
“Most newcomers will need a Canadian credit history to be approved for a Canadian mortgage,” explains Pommels. And yet, “most banks in Canada will not give someone a credit card if they do not have any Canadian credit history. Despite having many years of good credit history with worldwide credit products, such as products from VISA and MasterCard, a person may not be able to get a credit card or mortgage in Canada right away,” she explains.
Try these tips from Pommels:
• Start building your Canadian credit history: “Building good credit takes time. Slow and steady is the best approach,” she explains. Start with rent, utility payments or a cell phone account in your name and pay your bills on time, every time.
• Once you’re ready for a credit card, go slow: “Opening too many accounts could affect a credit score, so it’s best to be selective and open one account at a time,” says Pommels.
• Be patient: “Depending on a person’s financial situation and whether they have good payment habits, it might take anywhere from six months to a few years to establish good credit,” says Pommels. Use this time to save towards a down payment.
A strong credit history is key when it comes to mortgage approval and qualifying for the best rates. The smart move is to not hurt your credit score by doing things like missing bill payments or maxing out your credit cards. That said, bruised credit can be repaired and eventually overcome.
For starters, talk to a mortgage broker to assess your situation: “If the bruised credit is not so bad, then sometimes a B lender may make sense,” as an alternative to A lenders such as the major banks, says Dhalla, the Toronto real estate broker. Mortgage brokers have access to a wider selection of mortgage products from a variety of lenders, providing more options than banks can.
But if you have a major black mark such as a recent bankruptcy or consumer proposal, “it’s going to take time, dedication and persistence to prove to lenders that [you are] a trustworthy consumer,” says Pommels of Credit Counselling Canada.
Try these tips from Dhalla and Pommels:
• See a professional: Talk to a mortgage broker to explore your financing options and come up with a game plan for the short- and longer term.
• “Open a secured credit card, where you put down an upfront security deposit equal or higher than the card limit, and diligently pay it off on time,” says Pommels.
• Postpone your house hunt until you’ve rehabbed your credit. Use this time for financial literacy education and saving towards the down payment, say our experts.
Extra challenges can add some twists to your homeownership journey, but with the right action plan, you can get there too.