Worried about getting a mortgage? Tighter rules but options remain

TORONTO -- If you are self-employed, live in a rural area or don't have the best credit, you may find it increasingly difficult to get a mortgage.

Yet while tighter lending rules are making it harder for some people get approved by a bank, going to a second or third-tier lender isn't something everyone is comfortable with.

Real estate experts say if you are self-employed, traditional lenders like the big banks may still lend you the money -- it may just come at a higher interest rate, require a bigger down payment and increased scrutiny.

Customized products for the growing number of people who are self-employed often come with a minimum 10 per cent down payment instead of the usual five per cent, while the typical five-year closed rate for most is higher than what many banks are offering, said John Andrew, a real estate expert with Queen's University.

Your chances are also better if you can show income tax records dating back a few years that suggest a steady income.

"If you can show your income tax records and things like that going back 10 or 15 years, and your income is fairly steady or even better, rising, they're still going to consider you to be self employed, but you're going to be about as well off as you can possibly be," Andrew said.

"You'll never be as good as somebody with a non-self-employed job, which is kind of ironic because you can still lose your job, and that's the complaint that a lot of self-employed people have. They could be doctors or dentists or lawyers and be making $400,000 and have been doing it for 20 years, but at the end of the day, they're still consider to be self-employed, and there's always this suspicion that doesn't apply if you can show a pay stub from your employer."

Jason Scott, a mortgage associate with the Mortgage Group in Edmonton, says some people who are self-employed may also have difficulty getting approved by a traditional lender because the tax breaks available to them may make their income look lower than it actually is.

"If they're being tax efficient, they're paying more for that mortgage but they're saving a lot of money on income tax," he said.

Bad credit history is trickier, although some alternative lenders will still consider backing you if you can explain what happened.

"It has to have a story. It has to (give me) some sense as to why you were bankrupt," said Matthew Robinson, chief executive of W. A. Robinson Asset Management Ltd., which backs mortgages through its Pillar Financial Services division.

"What happened? Were you sick? Did you go a through a divorce? (I need) a story that makes sense, not just that you had bad credit because you don't know how to pay credit cards."

That may get you a higher interest rate, but those lenders argue the rate is justified because of the risk attached, and because of the extra work that goes into verifying information and working to understand the circumstances that led to the bad credit.

"Everybody thinks they deserve a 2.99 (per cent) mortgage. But at the end of the day, a 2.99 mortgage is zero risk. It's the lowest end of the scale," said Robinson, whose company works with self-employed people, rural properties and also provides bridge financing for construction projects.

"If there's any work involved, if there's any administration on a any level, the bank cannot afford to do a 2.99 mortgage. There's not enough room."

He suggests talking to a mortgage broker who will have relationships with various institutions and be able to steer you toward the best mortgage for your particular situation.

"Mortgages are becoming so complex, and there are so many options for people, they should actually be using a mortgage broker even if they think they're best client in the world," says Scott, who has also written a book to help homeowners titled, Approved! Mortgage Advice for All Stages of Life.

"It becomes a case of you don't know what you don't know. There are so many strings and such fine print on mortgages these days that it really does pay to use a broker."

Whatever approach you take, experts say there is always room to negotiate - whether on the mortgage rate or on the quality of your documentation.

And you would also be wise to put any mortgage documents you get from alternative lenders in front of a lawyer to make sure you are comfortable with the terms.