Over 15% of Canadians are self-employed; many of whom are homeowners or would-be homeowners in need of mortgage financing. There are many advantages to being in business for yourself including the expenses you claim or write-off. While this may be a great tax-saving strategy, it can also have an adverse effect when it comes to applying for financing, including a mortgage. This is because while you save in one area (by claiming less income) you also reduce the amount of “provable income” that can be used on a mortgage application. Business for self-clients may not claim as much in personal income due to business expenses and the opportunity to reduce their tax liability.
Luckily, we do have a way to solve these problems for the entrepreneurs of Canada. If you have been self-employed for at least 2 years and can prove this, plus have a proven track record of debt repayment evidenced by your credit bureau. Or if you can show at least 6 months of business bank statements we may have an option for you there as well.
Whether you are purchasing, refinancing, or transferring your existing mortgage – we can personalize a mortgage that works best for you. With options available of as little as 10% down, we do our best to provide mortgages to those self-employed individuals that have demonstrated credit worthiness regardless of income declared.
You are considered a self-employed borrower if you:
- Run a business as a sole proprietorship, with a partner, or as a corporation
- Work on contracts for a variety of employers
- Are paid by way of commission (only) income
Lenders evaluate salaried and self-employed borrowers much the same way when it comes to source/size of down payment and credit. The difference when considering a mortgage application for a self-employed borrower is income.
While a salaried individual must verify gross income through pay cheques, Notice of Assessment and Letter of Employment; a self-employed person must verify net income based on what is left after business deductions are subtracted from gross earnings.
Let’s look at a practical example:
If a self-employed person makes $100,000/annum (gross income) but writes off $25,000 in business expenses, they have a net income of $75,000. Unless they have supporting documentation to support more income the lender will treat the income the same as a salaried employee making $75,000.
But what happens when you are not able to prove enough income? This is where we have some lenders that will look at things with a little more practicality. There are products that are built around the business owner such as Stated Income and Equity mortgage offerings. These allow for more flexibility when it comes to financing or refinancing your home.
Tips for the Self-Employed Borrower
Knowing the amount of income required to finance your mortgage is the first step. Call a broker to discuss the amount you will need to show and talk to an accountant regarding the best way to manage income/business expenses.
Keep business financials and personal tax returns current.
Ensuring your accounting (T1 Generals, Financials- Notice to Reader) and personal tax returns are accurate and up to date with no amounts owing is important. Lenders will want to see at least a two year history for provable income and that your taxes are paid.
Maintain good credit.
Good credit – both maintenance and history (payments made on time with a history of credit facilities) are indicators to all lenders that you are a good risk.
Self employed mortgage rules
Most lenders require at least two years of steady self employment before you can qualify for a mortgage. However, there are exceptions to the two year rule. You might qualify with just one year of self employment if you can show a two year history in the same line of work. You will need to document an equal or similar income in the new role compared to your previous salary. Some lenders even count one yar of related employment plus one year of formal education or training as an acceptable work history.
In addition to proving their employment history, self-employed borrowers need to meet standard loan program requirements.
- Credit Score Credit History
- Current Debts (for your debt-to-income ratio)
- Liquid savings and assets for your down payment and closing costs
Lenders use a somewhat complicated formula to come up with “qualifying” income for self-employed borrowers. They start with your taxable income, and add back certain deductions like depreciation, since that is not an actual expense that comes out of your bank account.
Documenting self-employed income
In most cases, self-employed borrowers need to provide the following documents to prove their income to a mortgage lender:
- Two years of personal tax returns T1 Generals and Notice of Assessments
- Two years of business tax returns including statement of business activities.
- Business license
How Debt to Income Ratio Works
This is known as your ‘Total Debt servicing ‘ and this is how lenders calculate your maximum mortgage amount.
Your Income Monthly
There are many options and programs available for self employed borrowers that will not qualify traditionally.