Getting a mortgage when self-employed

by Emma Scott on 27 Oct 2021
While self-employed people enjoy the freedom of being their own bosses, they are often restricted by mortgage lenders.

There are over 2.9 million self-employed Canadians who enjoy the freedom of making their own schedules, being their own boss, and having complete control over their work-life. Despite the freedom that their jobs afford them, many self-employed people are restricted by mortgage lenders.

Self-employed people have a more difficult time applying for a mortgage loan. Lenders' criteria are more difficult to meet when dealing with business expenses, and the precariousness of self-employed income makes a business owner a risky lender.

Nevertheless, it’s not impossible to qualify for a mortgage as a self-employed person. You can apply for a mortgage and buy property without having to sacrifice your career.

Lenders' aversions to self-employed borrowers

Lenders are much more reluctant to lend money to self-employed individuals because there is more risk involved.

Self-employed mortgage applicants are known as risky borrowers because their income is not fixed—they almost always have a varying amount of income. Self-employed people’s income varies depending on their sales, other business costs, and more. Their unstable income makes lenders worried that self-employed borrowers will not be able to make their monthly payments, thus defaulting on their mortgage.

In addition, most business owners tend to use their business expenses to reduce their taxable income. As a result, lenders wonder whether self-employed borrowers can truly afford a mortgage.

Self-employed mortgages: What are they and how you can get one

Self-employed people rarely qualify for a standard mortgage because of their varying employment income. But, thankfully, this doesn't mean that you need to choose between property and your career—there is a special type of mortgage developed solely for business owners.

Self-employed mortgages are designed to make buying a home easier for self-employed people.

A self employed-mortgage is a non-traditional type of mortgage that is only open to people who own full-time or part-time businesses, including sole proprietorships, incorporations, and partnerships. Individuals need to have owned their business for at least two years to qualify.

Like most home loans, self-employed mortgages are available in fixed and variable mortgage rates for a variety of different term periods. A borrower will also need to pay a premium if their down payment is less than 20%. However, a self-employed individual can expect to pay a higher premium than a person with a standard mortgage. The higher premium is added on top of the mortgage and paid off in your mortgage payments.

Business owners interested in applying for a self-employed mortgage should seek the help of a mortgage broker. Mortgage brokers are professionals who have special access to private mortgage lenders beyond the big banks. They can help you locate private lenders who specialize in self-employed home loans.

Applying for a self-employed mortgage

The traditional mortgage application process is relatively fast and easy. Applicants need to provide proof of their employment income, some bank statements, and their credit score before they receive approval. This process is not as easy for self-employed workers.

It can take a lot of hard work and waiting for an independent worker to get a mortgage. They will need to jump through more hoops, proving their self-employment income and their ability to make their mortgage payments.

Since self-employed home loans are high-risk, applicants will need to provide more documentation than the traditional application. Some documents that you can expect to provide for your self-employed mortgage application are:

  • Financial statements about your business income
  • A Notice of Assessment from the past two to three years
  • Your personal credit score and history
  • Proof that your personal tax returns are paid
  • Proof that you are the principal owner of your business
  • Contracts that show expected revenue for the coming years (if applicable)
  • A copy of your borrower's business, GST license or Article of Incorporation proving that you are licensed
  • Proof that your down payment was not gifted (optional)
     

If you can provide a Notice of Assessment proving your income, you may be able to receive the same mortgage products and rates as traditional borrowers.

Things all self-employed borrowers should do

Self-employed income mortgages are, inarguably, one of the hardest types of mortgages to qualify for. You must own your business for two years before you can qualify, and approval is not guaranteed.

Self-employed borrowers will need to have extensive documentation to prove their income to lenders.

How to better your chances of receiving approval

Receiving approval for a self-employed mortgage takes a lot of hard work and documentation. You can prepare for your application—and set yourself up for success—by taking the necessary steps.

Create a good system of documenting your income and employment

Self-employment is a very fulfilling career path, but it can cause your bank statements to shrink.

Many business owners use their own income to pay business costs, reducing their tax returns. While this is beneficial because it allows more money to go back into your business, a lender may see it as an inability to make a mortgage payment.

You can prove that you have sufficient income by documenting your income with a paper trail.

The Canada Mortgage and Housing Corporation (CMHC) has permitted a broad range of documents to be used to prove your net income and employment. These documents include T-4 slips, pay stubs, a copy of your federal tax return, proof of income statement from the Canada Revenue Agency, and a T2125, which is a statement of business or professional activities. These documents can help prove your net income to your lender.

We recommend filing these documents away every year. Not only will it help you apply for a home loan in the future, but it will also be better for your tax returns.

Improve your credit score

A good credit score is integral to receiving approval for mortgage financing. Most lenders will look for a credit score anywhere between 690 and 900 because it shows your ability to spend and pay off loans responsibly.

The best way to get a good credit score is to take out loans. Loans could be buying a car and paying it off or something as simple as using your credit card. With every on-time payment, you will build up a good credit history, thus improving your score.

Save more than the minimum down payment

A down payment is integral to showing lenders that you are a financially responsible individual despite your self-employment.

Although you are only required to have a 5% down payment, a down payment of this size categorizes your mortgage as high-risk. If possible, we recommend that every self-employed borrower save a larger down payment.

A down payment of 20% will allow you to get a mortgage easier and show your responsibility to your private lender. A 20% down payment will also allow you to avoid having to pay for mortgage loan insurance, also known as mortgage default insurance.

Default insurance premiums cost homebuyers anywhere from 2.8% to 4.0% of the purchase price—a hefty addition to your mortgage. It’s best to save more and avoid having to pay this premium on top of your mortgage.



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