Empowering businesses through strategic lending.
More and more Canadians are ditching the standard 9-5 career path and breaking free from climbing the corporate ladder to enjoying the benefits of being their own boss. While the idea of being your own boss sounds enticing and comes with many perks, navigating the world of mortgages can be incredibly challenging for self-employed individuals. Without the conventional proof of income that comes with traditional employment, self-employed individuals must navigate with different strategies, often facing more strict and complex criteria. Lenders typically view self-employed individuals as high-risk borrowers because their income may fluctuate or be difficult to prove. However, there are a variety of mortgage products available that are tailored specifically for the unique financial situation and needs of self-employed individuals. Understanding your mortgage options is crucial but with the right knowledge and advice, you can show lenders you are a reliable borrower.
Self-employed individuals often fall into one of the following categories:
Independent Contractor
Independent contractors are hired to complete specific tasks or projects for companies or individuals. They are compensated for their work but typically do not receive additional benefits beyond the agreed contract. This category includes professionals like doctors, dentists, plumbers, electricians, and lawyers, as well as creative and technical professionals such as writers, software developers, marketers, actors, and musicians who provide specialized services directly to the public.
Sole Proprietor
Sole proprietors own and operate their businesses independently. They retain all profits but are also responsible for any losses. While they can hire employees to assist, sole proprietorship is often managed by a single person who handles both the operations and decision-making.
Partnership
Partnerships involve two or more individuals working together to manage and operate a business. Profits and losses are shared among the partners, making this structure like sole proprietorships but with shared control and responsibility.
Self-Employed Mortgage?
A self-employed mortgage is designed for borrowers who earn their income directly from their own business or freelancing work rather than a fixed salary or wages from an employer. Most self-employed individuals typically face fluctuating income compared to your common borrower who receives a consistent pay cheque regularly and therefore, lenders will evaluate self-employed individuals’ income differently. With a traditional mortgage, lenders look at the net income you declared on your last two tax returns which could be significantly lower due to tax deductions and claimed expenses. Self-employed lenders will take into consideration those differences and are more flexible with your reported income, ensuring you have access to the financing you need.
a Self-Employed Mortgage
Income Verification That Works for You
Lenders offer flexible options to verify your income, factoring in tax deductions and business expenses to align with your unique financial situation.
A Process Built for Entrepreneurs
The qualification process is customized to accommodate self-employed individuals, making it easier to secure a mortgage that fits your financial goals.
Tailored Rates for Your Needs
Competitive rates and terms are designed specifically for self-employed borrowers, ensuring affordable and fair financing options.
Boost Your Borrowing Power
By considering gross income instead of net, lenders can increase your borrowing potential, helping you qualify for the home you want.
Save Money on Taxes
Self-employed individuals can often take advantage of tax deductions that reduce taxable income, making homeownership even more affordable.
Qualify for a Higher Mortgage Amount
With alternative income verification and gross income calculations, self-employed borrowers may be eligible to qualify for larger mortgage amounts.
Lenders often evaluate self-employed borrowers based on the following key factors:
1. Proof of Income
To assess your earnings, lenders will ask for:
- Tax Returns: Notice of Assessment and T1 Generals (last 2 years).
- Business financial statements (last 2 years).
- Bank account records showing consistent deposits over 12 months.
- Confirmation of income tax payments (if you owed taxes on your last NOA).
- Information about your business operations.
2. Debt Ratios
Lenders use two important ratios to determine how much you can borrow:
- Gross Debt Service (GDS): The percentage of income required for housing costs.
- Total Debt Service (TDS): The percentage of income required for all debts, including housing.
To qualify, your GDS should typically be below 35%, and your TDS below 42%.
3. Credit Score
Most lenders prefer at least two years of consistent self-employment income to demonstrate stability and reliability.
4. Down Payment
In Canada, down payment requirements typically range between 5% and 20%, depending on the home’s price. For self-employed borrowers, providing a larger down payment can increase your chances of approval by reducing the lender’s risk.
5. Employment History
Maintaining a strong credit score is critical for self-employed applicants. A good credit score—generally 670 or higher—demonstrates reliability and a history of on-time debt repayment. The higher your score, the better your chances of securing favorable terms.
1. Traditional income verification:
Your employment income is verified through your tax returns. Mortgages with traditional income verification typically have the lowest interest rates and down payment
requirements as lenders view them as less risky.
2. Nontraditional income verification:
Your business financial statements and bank statements are used to verify your income. Most self-employed individuals fall into this category. Mortgages for
nontraditional income verification may call for a larger down payment, have slightly higher interest rates and possibly require mortgage default insurance.
3. Stated income:
You are not able to verify your income and must ensure your stated income is reasonable based on your business and industry. Stated income will have the highest mortgage rates with larger down payment
requirements and property limitations.
Self-Employed Borrowers
Stated Income Mortgages
Stated income mortgages are designed for individuals who may have difficulty verifying their income through traditional methods. These mortgages typically require a higher down payment of 35% or more. With a stated income mortgage, you declare your income without providing supporting documentation, offering a simplified approach to financing.
Insured Stated Income Mortgages
If making a large down payment is not feasible, an insured stated income mortgage may be an alternative. With this option, you can put down as little as 10%, but you will need to pay an insurance premium since the lender assumes a higher risk. This type of mortgage requires a strong credit score and relies on private mortgage default insurers, as CMHC does not insure stated income mortgages.
Sagen Business for Self-Advantage Program
The Sagen Business for Self-Advantage Program is designed for self-employed borrowers who have been in business for at least two years and may not meet traditional income verification requirements. Instead of relying on standard tax documents, lenders assess business history and operational records to determine eligibility. This program is available for owner-occupied properties, including those with up to two rental units, provided the borrower occupies one unit. However, it does not apply to vacation homes, secondary properties, or rental-only properties. A strong credit profile is required, and applicants with a history of bankruptcy or commission-based self-employment may not qualify.
CMHC Business for Self-Program
The CMHC Business for Self-Program provides access to mortgage loan insurance for self-employed borrowers, offering flexible income verification options. Unlike traditional mortgage products, this program accommodates entrepreneurs with alternative documentation, such as business financial statements, to demonstrate income stability. With no additional premium surcharges, this program helps make homeownership more accessible for self-employed Canadians. To qualify, applicants should have at least two years of business experience or relevant industry experience.
Canada Guaranty Business for Self-Program
The Canada Guaranty Business for Self-Program (also known as the Low Doc Advantage Program) helps self-employed borrowers qualify for mortgage financing with reduced documentation requirements. This program is designed for borrowers with strong credit and a minimum 10% down payment, allowing for alternative forms of income verification, such as bank statements or business financials, instead of traditional tax returns.
Lower Your Debt-to-Income Ratio
Paying down outstanding debts or reducing long-term obligations can enhance your financial profile and make you more attractive to lenders.
Maintain Consistent Cash Flow
Lenders value steady income, so managing your finances effectively and paying yourself regularly is essential.
Organize Your Financial Records
Keeping accurate and detailed business and personal financial records can streamline the approval process and improve your chances.
Improve Your Credit Score
A stronger credit score increases your eligibility and helps you secure better mortgage rates.
Build an Emergency Savings Fund
Lenders prefer to see that you have financial reserves to cover your mortgage payments during periods of reduced income. Aim to save at least six months’ worth of expenses as a safety net.
Consider a Co-Signer
If needed, a partner, spouse, or close relative with a strong income or good credit can co-sign your mortgage. This can improve your application and increase your chances of approval with lenders.
Ready to Secure Your Mortgage? Contact Us Today!
Let our experts help you navigate the mortgage process and find the best financing option for your
self-employed situation.
FAQ
Not always. While some self-employed individuals may face higher rates due to perceived risk, many lenders offer competitive rates depending on your financial profile. Working with a knowledgeable broker can help you secure the best rate available.
The approval process typically takes a few weeks but can vary based on the complexity of your financial documents. Ensuring all necessary paperwork is prepared in advance can help streamline the timeline.
Lenders consider several financial factors when reviewing self-employed mortgage applications, including:
- Personal and business tax returns for the past two years.
- Profit and loss statements from your business.
- Bank statements to verify cash flow and income stability.
- Your credit history to assess financial reliability.
- Proof of down payment funds.
Lenders generally average your income over the past two years using your tax returns and business financials. A mortgage broker can help present your financials in the best possible light to strengthen your application.
Yes, self-employed individuals can apply for a second mortgage. Lenders will evaluate your equity, creditworthiness, and income stability to determine eligibility.
There is not a fixed time limit, but most lenders require at least two years of self-employment income to demonstrate stability.
Yes, refinancing is an option for self-employed borrowers. This can help you access better rates, consolidate debts, or unlock equity in your home.
Lenders may consider alternative income verification options, such as stated income programs, which focus on gross income rather than net income. A larger down payment or a strong credit score can also improve your chances of qualifying for a higher amount.
Yes, there are lenders who specialize in working with clients who have less-than-perfect credit. You may need to provide a larger down payment or explore alternative mortgage solutions.
Yes, having a dedicated business bank account simplifies the documentation process and helps validate your income and expenses, which is crucial for your mortgage application.
Yes, options like stated income mortgages are available for self-employed borrowers who cannot provide traditional income verification. These typically require a higher down payment and may come with slightly higher interest rates.
Your personal credit score is the primary factor in your mortgage application. However, if you have personally guaranteed business debts, they may impact your debt-to-income ratio.
Self-employed mortgages are generally designed for residential properties. If you are looking to purchase a commercial property, different loan products are available, and a broker can guide you through the best options.
If your application is declined, a broker will help you understand why and work with you to address any issues. This may include improving your credit score, restructuring your financials,or exploring alternative lenders who specialize in self-employed borrowers.