Meeting all the qualifications required for getting a self-employed mortgage can be challenging but not impossible. Traditionally the bread and butter of B-lenders, the ever-expanding private sector of individual contractors and freelancers have encouraged A-lenders to accept their business too.
However, if you’re self-employed, there are a few things to keep in mind to secure a possible mortgage offer.
What Is a Self-Employed Mortgage?
Before looking at what qualifications you should meet, let’s first see what a self-employed mortgage actually is.
A self-employed mortgage is a type of loan available for borrowers relying on self-employment or business income instead of employment income, meaning salary or wages.
Since your income will be different from a regular borrower’s, lenders weigh in certain factors and have several requirements that set things apart from traditional mortgages.
When evaluating the borrower’s qualifications for a traditional mortgage application, lenders usually analyze the net income declared on the applicant’s tax return. Due to tax deductions and other expenses claiming benefits, this income can seem artificially low for self-employed Canadians. A self-employed mortgage will allow more flexibility when it comes to reporting your income.
Who Qualifies As Self-Employed?
Legally, a self-employed individual is someone who makes their income through securing contracts and servicing clients.
They don’t work for an employer and don’t benefit from a fixed wage from a third-party employer. They can be private business owners, commission salespeople, freelancers, farmers, fishers, etc.
Self-employed individuals can be working and earning a salary from a corporation they own themselves, thus qualifying as incorporated self-employed. A shareholder only receiving dividends and not being actually employed by the company doesn’t qualify as self-employed.
The applicant needs to have been self-employed for over 24 months for his income to be conclusive. Some lenders may require 3 years for extra safety.
When assessing a self-employed individual’s business income, this will be done on top of their personal income. Due to deductions for tax purposes, a self-employed income can be artificially lower. Business income is considered on top of personal income.
Your self-employment status is based on the documents you are providing, such as income tax returns and other bank statements.
How To Get a Self-Employed Mortgage?
When requesting a mortgage from the bank as self-employed, keep in mind there are three types of income qualifications to consider:
Traditional Income Confirmation
This means your income is verifiable via personal tax returns. Most self-employed business owners won’t be able to confirm their “real” income traditionally.
This type of mortgage will have the lowest interest rates and down payment requirements.
Non-Traditional Income Confirmation
Since your personal tax returns can’t reflect your real income, your actual income will be determined based on your business’s financial statements. This is the most common procedure for self-employed contractors.
This mortgage may require mortgage default insurance and comes with a slightly higher mortgage rate and down payment.
Stated Income
Also called “no income verification mortgages”. This means your income is stated in good faith, but cannot be verified. Stated income addresses self-employed borrowers who cannot meet traditional mortgage qualifications and is only accepted by private lenders.
The higher risk associated with this type of mortgage is counter-weight by high mortgage rates and large down payment requirements, not to mention restrictions on the type of property that can be bought.
Required Documentation
Your mortgage application may require the following documentation:
- Articles of Incorporation, Business Number Registration, GST/HST Account Number – This will serve as proof of how long your business has been operational — only required for corporations. The GST/HST number is required if you gross over $30,000 sales or revenue in a single quarter/ calendar year.
- Notice of Assessment for the past 2-3 years – Some applications will make do with your T1 General income tax returns to summarize your income. Your NoA is essential since it shows any potential unpaid taxes you might have.
Unpaid taxes represent a huge red flag since the CRA could eventually register a lien on your home and resell it on the market.
- Financial Statements – Especially necessary for non-traditional income verification, where you want your mortgage lender to take into account your business income on top of your personal one.
- Bank Statements – The more documentation to back up your income claims, the better. You can include your business’s bank statements as well as your T2 Corporation income tax return. You can even add ongoing contracts with expected revenue.
Know Your Credit Score
Another aspect considered by lenders when assessing self-employed mortgage qualifications is your credit score.
Each individual has a numerical value assigned to them, based on their borrow and returns history, giving creditors an idea of how likely you are to repay your debts in the future. Its value ranges from 300 to 900. Anything above 660 qualifies as a good credit score, with 725+ being very good.
Quite a few banks offer special programs for the self-employed. National Bank Mortgage for the Self-Employed, RBC Self Employed Mortgage and Scotia Mortgage for Self Employed, to name a few. While other creditors such as BMO, CIBC and TD don’t have a specific platform, they are known to consider and evaluate all mortgage applications equally.
Minimum down payments and maximum loan requirements differ from one bank to another.
Finding Mortgage Lenders When You Are Self-Employed
Traditionally, lenders are divided between A-Lenders and B-Lenders. A-Lenders usually have stricter lending criteria, requiring all applicants to pass a mortgage stress test and prove they have a stable income and a good credit history.
B-lenders, on the other hand, are more flexible when it comes to providing mortgages to self-employed individuals. They require fewer qualifications and can arrange a mortgage within a few days. When you apply for a private loan, the property you currently own or plan to buy is used as collateral.
You can get a private loan even with bad or no credit. This type of home loan is also a good option for someone who needs funding quickly — typically funded within seven days.
Working With a Mortgage Broker
Working with a mortgage broker specialized in creative and alternative financing may be a good option if you are self-employed. Mortgage brokers will not only recommend the best type of mortgage and lender, but they can also help you prepare your loan application and submit it to several lenders at once.
These are experienced professionals who offer impartial advice about mortgages, home equity loans, refinancing options, rates and more to find the best offer for their clientele. They know what it takes to qualify homeowners for competitive rates on top of providing solid financial solutions for those looking to purchase or refinance real estate properties such as homes or commercial property.
Qualify And Get a Self-Employed Mortgage (5 Step Recap)
Here’s a short recap of the self-employed mortgage qualifications discussed above:
- The first thing you need to do is make sure you have at least two years of provable self-employment income. This will make it easier to qualify.
- Prepare all documentation. This includes tax returns, NOA, financial and bank statements, and any other essential details about your business.
- Build up a solid credit score to reduce your mortgage rate. CMHC-insured mortgages require a credit score of at least 600.
- Save up for a significant down payment. Insured self-employed mortgages require at least 5% paid upfront, but uninsured mortgages will require more.
- Work with a trusted mortgage broker who understands your goals and can provide you with a loan that will help you achieve them.
If you are interested in finding out more about self-employed mortgage qualifications, reach out to us.
In the meantime, you might also enjoy:
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