Recent statistics point to the fact that self-employment is growing in popularity. Statistics Canada reports this segment of the workforce rose by 50,000 in August of 2023. That’s the first big increase in the last nine months. Stats Canada also reports that 20.1% of workers are working from home. It’s reasonable to assume a portion of this number is the self-employed looking to get mortgages. That’s always been part of the issue facing these people–getting this type of financing from a traditional lending institution. Private mortgages are a good solution. They can allow self-employed people to refinance an existing property or get the money for a new one.
Read on to find out what you need to know about how these alternative lenders and the self-employed mesh.
What Advantages Do Private Mortgages Offer to Self-Employed Individuals?
There are differences between private mortgages and those from more traditional lenders. Here’s a rundown of what to expect.
- Credit unions and banks use a stricter set of criteria to decide whether or not to approve an applicant. One of the metrics they rely on heavily is the credit score. According to Equifax, a poor score ranges from 300 up to 579. Numbers that are considered excellent range from 800 to 850.
- Private lenders change the focus for approval. They look at the amount of equity that someone has in a property and the appraised value. These alternative lenders also use what’s called a Loan-to-Value (LTV) ratio.
- Regulatory oversight is another key difference between the two. Private lenders are regulated under the Ontario Mortgages Act. More traditional lending institutions are regulated federally.
What Should Self-Employed Individuals Consider Before Choosing a Private Mortgage?
Alternative loans require that people who run their own businesses consider a few more factors. While there are significant benefits to these mortgages, there are also some considerations.
- The approval process is typically faster with a private mortgage, but the trade-off is higher interest rates. If you’re self-employed with a bad credit history, an alternative lender is taking a bigger risk by approving your loan.
- These loans are perfect for self-employed individuals as approval is possible without a traditional source of income. Big banks and credit unions can require pay stubs and other types of verification. Because an alternative lender focuses on equity, freelancers and people who work in the gig economy have a higher chance of getting a loan.
Self-employment can be challenging due to market fluctuations, making private mortgages a viable option for business owners. Although these loans primarily cover interest payments, they can also halt legal actions such as foreclosure and power of sale.
What Criteria Must Self-Employed Individuals Meet for Private Mortgage Qualification?
Private lenders look at the amount of equity in a property plus the appraised value. The location makes a difference, as does the overall condition of the house and structure.
The Loan-to-Value (LTV) ratio is crucial in this process. It is calculated by dividing the numerical value of existing mortgages by the assessed market value of the properties.
Self-employed individuals need to check a few boxes before deciding on a private loan.
How Do Private Mortgages Benefit the Self-Employed?
Private mortgages can benefit self-employed people in several different ways.
Faster Turnaround Times
These loans can be processed faster than their traditional counterparts. One of the reasons is that private mortgages are less regulated than ones at credit unions and banks. The traditional process can take weeks from start to finish. You’ll need to come up with banking statements and financial information. Your credit score is important, and your net worth comes into play. Private mortgages highlight different metrics.
A Different Focus
Private lenders emphasize equity and the Loan-to-Value (LTV) ratio rather than credit scores. Most private mortgage lenders will lend up to 75% LTV.
For instance, if a property is worth a million dollars and a borrower seeks a $600,000 private mortgage, the applicant has a 60% LTV. Most private lenders will go up to 75% LTV.
While the emphasis for private mortgages is on equity, credit history and credit score still play a role, albeit to a lesser extent.
What Advantages Do Private Mortgages Offer to Self-Employed Individuals?
These alternative mortgages are a benefit to the self-employed and people who work in the digital economy. Self-employed gig workers in industries such as e-commerce can take advantage of the income requirements for a private mortgage.
Despite owning properties, these individuals often have irregular and sporadic incomes due to freelancing. According to HRreporter, approximately 8.75 million Canadian adults were part of the gig economy as of March 2023.
Alternative mortgages offer a streamlined process focusing more on equity and less on income verification documentation.
The approval process for one of these loans also favours the self-employed. Understanding the differences between a traditional and an alternative loan can make these benefits clear.
Need Help With a Self-Employed Private Mortgage?
Mortgage Broker Store specializes in various mortgage-related products. Mortgage requirements that don’t meet those from traditional lending institutions are a priority. We have private lenders, brokers, and licensed mortgage agents ready to look after you. Let us help you prepare for and get a private loan that suits your needs. Email ron@mortgagebrokerstore.com or call 416-499-2122.
