Self Employed

A self-employed mortgage is a residential mortgage on a home, or a commercial mortgage on a commercial property owned by or being purchased by someone who is either self-employed or owns their own business or corporation.

Because self-employed Canadians have a different type of way of declaring their earnings than salaried employees who are employed full-time or part-time, their declared net income is not always large enough to qualify for a traditional mortgage at the banks in Canada.

What You Should Know

  • Self-employed business owners and workers will have their income assessed differently, as self-employed income can be artificially lower due to deductions for tax purposes
  • Your self-employment business income will be considered on top of your personal income
  • You will need to have been self-employed for at least two years for your self- employed income to be considered
  • You can borrow up to 95% LTV with CMHC insurance or 90% with private insurers Sagen or Canada Guaranty. CMHC requires income verification while private insurers do not.
  • Without mortgage default insurance, you can borrow up to 80% Loan-to-Value (LTV) with a self-employed mortgage, the same as a traditional mortgage
  • You will need to provide documents such as your income tax returns and company financial statements
  • Self-employed borrowers do not have to verify their income with a stated income mortgage product but, stated income mortgages have higher mortgage rates and down payment requirements. They also require less paperwork.

Over the last few years, lenders have been making it increasingly difficult for the self-employed to get a mortgage. The good news? You’ve got options.

Option 1

Qualify for a Mortgage Based on Your Actual Income (Prime Mortgage)

If you have good credit, manage your debt well and have at least a 12-month history of credit, you may be able to qualify for a mortgage based on how much you actually earn. The key: you’ve paid yourself and declared enough income for the past two years and you’ve filed your taxes and don’t owe the CRA any money.

What do lenders look for?

Lenders will look at the income stated on Line 150 of your tax return. They don’t only look at the fact that you grossed $225,000 per year but wrote it down to $25,000 for “tax reasons”. If you paid yourself $25,000, the lender assumes your income is $25,000 and you can afford a home that a $25,000 income could carry.

If you have enough line 150 income for the past two years, then you qualify for about five times your Line 150 income. Lenders will average your income over a 2-year period and will be looking for your income to be steady or increasing over the 2 years. If your income is going down, the lower line 150 income will apply.

So that $25,000 income in our example above, will help you qualify for approximately $225,000 in mortgage financing.

CMHC recently announced a new lending program for borrowers who are self-employed for 2 years or less. Normally, a lender needs to see a 2-year self-employed period to qualify you. CMHC, however, is filling a gap in the market where this kind of example may happen:

Peter, an IT professional with ten years’ work experience as a full-time employee, decided one year ago to incorporate and contract himself out to other firms. As a result, his tax returns may show a lower income than what he really makes. With the CMHC program, we’re now allowed to extrapolate what Peter could make based on contracts and bank statements and NOT Government of Canada tax returns to help him qualify with as little as 5% down.

Option 2

Qualify for a Mortgage With Stated Income

So, what if you make a good gross income, but simply have expenses that bring your income below what you need to qualify using the 5x income?

Here’s where an interesting program kicks in, called Stated Income. Simply put, the lenders take a number between your gross and net incomes (line 236 and line 150) and formulate an Income Reasonability number to qualify you. Sounds pretty … strange?

Some rules of thumb for stated income mortgages:

  • The lenders usually do not DOUBLE your line 150 income.  Example if you show $50,000 on line 150, you could get away with stating $100,000 to qualify, but not much more than that, unless we can prove through other financial documents that there’s a solid business case to be made.
  • Cross over the $100,000 mark is only for those who show really good gross income and have a really good financial picture.
  • You need to keep the purchase price under $999,999 – this is a CMHC-insured program and CMHC won’t insure any properties over $1M
  • The property cannot be a rental – it must be owner-occupied
  • You have to have at least 10% down for this program
  • You have to have 5% of your own funds saved to get into this program (meaning you can’t be gifted the full amount of your down payment).
  • You cannot have any late payments over the last 12 months, period end of story. None.
  • You must not have any taxes owing to the CRA and your taxes must be filed

Pro Tip: Here’s where I’ll say this for the record – if you’re self-employed, you MUST talk to a mortgage broker. Honestly, unless you’re showing a ridiculously high income, your bank will simply have no clue how to finance you.

Option 3

Get Financing Through Alternative Lenders

If you have bad credit and are self-employed and/or if you do not have enough income to qualify the traditional way or via stated income, then you have the option of getting a mortgage with an alternative lender.
Alternative lenders:

  • Charge about 0.5% to 1% more than typical mortgage lenders
  • Charge fees to close their mortgages (usually 1%)
  • Have stricter appraisal policies

Alt-lenders help self-employed individuals get mortgages by using alternative forms of proof of income: bank statements, invoices, work contracts., etc. The good news: you don’t need to prove CRA was paid and lines 150 and 236 of your income tax return are not used to qualify you for the mortgage.

Alternative lenders offer short-term solutions with contracts that are usually fixed for 1-3 years. Why? They want to have you for a short period and then you’ll hopefully have had enough time to qualify for more traditional lending.

Option 4

Get Financing Through a Credit Union

Self-employed individuals may find that a credit union is their best option to qualify for a mortgage. Think of credit unions as in-between the prime lenders (show me the income) and the alternative lenders (we don’t need to see any tax paperwork). Credit unions will want to see:

  • 3 months’ business statements to show your recent business activity
  • At least 2 years of tax returns

Credit unions will lend on properties priced over $1M and don’t charge fees, however, their interest rates are higher. Investor self-employed are also a target client for this kind of borrowing option where yield and cap rates matter more than interest rates.

Option 5

Private Lending

You may be shuddering in your pants thinking “why would Jake recommend a private mortgage lender?” In times of emergency, that’s why (and when). Private lenders generally do not care one bit about your income. Literally, zero. They care about how they will get their money out (and when) and they’ll charge you an arm and a leg (rates, fees etc) but they can close quickly in case of emergency for you to figure out what your next options are.

Being a self-employed home Buyer isn’t easy. Make sure you’re aware of all the financing options and if you’re considering buying a home this year, talk to a mortgage broker before filing your taxes.

Have questions? You can reach me here.