Mortgages for the Self-Employed

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Statistics show that nearly 20% of all income earners in Canada are now self-employed (at least part-time). We often question why it is so difficult for this growing demographic to get a mortgage. Some of the issues include the fact that income for the self-employed is usually hard to prove. Many business-for-self owners are motivated to expense as much as possible in order to minimize their taxes payable, which is something many banks or lenders will not recognize.

For salaried workers the numbers are simply printed out in black and white on a recent pay stub or a T4 slip to show proof of income. But for someone who is self-employed and who has different clients and no guaranteed paycheque every week, the requirements for a mortgage application are much more complicated. Self-employment mortgage approval in not impossible. It is actually attainable with efforts made well before the application; how well an applicant prepares to show financial strength.

When lenders deal with self-employed clients, they have to rely on what is termed stated income, as opposed to verified income. “Stated income is the amount of income the borrower attests to having, and which can be supported with documents such as tax returns, notices of assessment, contracts and financial statements.”

In order to obtain a self-employed mortgage, most lenders require the most recent tax Notices of Assessment as well as two years of financial statements to get started with the mortgage application. Those who are able to provide the proof of income can access the same mortgage rates as traditional borrowers, however, those who cannot must have a good credit history at the least and must provide a minimum down payment of 10%.

The two years of financial statements indicate the strength of the business and the ability of the business to pay the owner a reasonable salary for that owner to have cash flow to repay debt (according to Rick Arnds, senior manager, emerging markets at Meridian Credit Union). The Notices of Assessment tell how much the business owner is actually reporting to the government as their income.

Business owners have a tendency to report relatively small income after they have accounted for all of their expenses. Mortgage lenders know this, and the most important factor comes down to financial strength of the applicant. Lenders look for a reasonable reported income. For a successful self-employment mortgage approval, an applicant must show or state income and pay bills on time. They will also consider assets that are sometimes accumulated over time. If the borrower is applying for a $400,000 mortgage loan and his or her Notices of Assesment do not indicate income that would support this but the business owns vehicles and or valuable equipment, the lending institution will look closer. If the business has strong assets with a good credit report and history of repayment, there would be indication of a decent cash flow to repay the $400,000 loan and the business owner in this situation would most likely be approved for the mortgage.The lender needs to understand the borrower’s ability to pay back the debt they are asking to take on. The best way to do this is for the lender to get to know the business and the business owner as well as possible.

In addition to your Notices of Assessment, some of the other supporting documentation a lender might need to go over for a self-employed mortgage application include:
Financial statements for your business.
Proof that your HST and/or GST is paid in full.
Contracts showing expected revenue for the coming years.
Your personal and business credit scores.
Proof that you are a principal owner in the business.
A copy of your borrower’s business or GST licence or Article of Incorporation showing you are licensed.
Proof that your down payment has not been gifted.

Using a mortgage broker:

Because it is difficult to find out which lenders specialize in self-employed mortgages or to know which lenders have more favorable terms for the self-employed, this is a situation where the help of a mortgage broker will be an obvious advantage. Mortgage brokers have connections to multiple lenders and have a vast knowledge of the mortgage market. Therefore, a broker can connect you to the lender most suited to your situation.