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Empowering Self-Employed Homebuyers: Unlocking the Door to Business for Self Mortgage Success

Mortgage Options for the Self-Employed: A Comprehensive Guide

Business For Self Mortgage Options.

With the rise of self-employment in Canada, accessing mortgage options tailored to this demographic is becoming increasingly crucial. Nearly 20% of all income earners in the country are self-employed, ranging from business owners to contractors, each facing unique challenges when securing a mortgage. This comprehensive guide delves into the intricacies of self-employed mortgages, shedding light on qualifications, income verification methods, and lender options to empower self-employed individuals in their homeownership journey.

Yes, getting a mortgage when you’re self-employed can be challenging, but mortgage agents have options that the big banks do not offer!

What is a Self-Employed Mortgage?

Self-employed mortgages cater to individuals whose income is not salaried or derived from the majority ownership of a corporation. For the purposes of getting a mortgage, the term “Self-Employed” or “Business For Self” BFS means you’re not on a typical employee payroll, with CPP/EI and income tax deducted from your pay every 2 weeks. Unlike traditional employees, self-employed individuals often experience fluctuating income, posing challenges in the mortgage application process. The Big 6 Banks in Canada usually categorize these as prime or subprime, depending on how income is verified, which means they have limited flexibility to accommodate Business For Self individuals. This is where a mortgage agent can make a crucial difference with access to multiple lenders specializing in different financial situations.

Qualifying For A Mortgage When Self-Employed:

Qualifying for a mortgage as a self-employed individual hinges on factors such as the length of self-employment and incorporation status. Requirements vary based on the type of self-employment, ranging from sole proprietorships to incorporated businesses. Documentation such as tax returns, business financial statements, and deposit history can be used to demonstrate income stability and creditworthiness.

How Much of my Appraised Home Value can I Finance When Self-Employed?

Self-employed individuals who can verify their income may finance up to 80% of their home’s purchase price without default insurance. B lenders are more flexible with lending criteria as they do not offer default-insured lending. This allows for competitive financing options comparable to traditional mortgages, provided income can be substantiated through pre-filing and post-filing documentation over two years.

Self-Employed Mortgage Default Insurance Rates:

Taxed income is crucial in determining mortgage default insurance rates and differentiating between traditional and alternative lending options. While conventional lenders offer lower rates for verified income, alternative lenders provide solutions for individuals with limited or non-traditional income documentation, though these may come with a higher premium to mitigate risk.

Types of Self-Employed Income Verification:

Self-employed individuals can verify their income through traditional methods such as tax-based income averaging, non-traditional methods such as bank statements and financial statements, or stated-income declarations. Each method offers distinct advantages and considerations that influence mortgage eligibility and terms.

Required Documents for a Self-Employed Mortgage:

Documentation requirements for self-employed mortgages include Notices of Assessment, Income Tax Statements, financial statements, proof of business ownership, and credit scores. These documents help lenders assess income stability, business ownership, and creditworthiness, facilitating the mortgage approval process.

What is a Stated Income Mortgage?

With a stated-income mortgage, the lender does not verify your income through traditional methods. Instead, they allow you to state or provide a signed income declaration (Line 150 of your tax return) within reasonable limits. With this type of mortgage, you often won’t be required to provide abundant documentation to prove your income. Instead, the stated figure must be considered reasonable compared to the average income in your business or industry. Examples of documents used to verify Stated Income may or may not include Bank Statements, Invoices, etc.

If you have sufficient Line 150 income for the past two years, you may qualify for approximately five times your Line 150 income. Lenders will average your income over 2 years and look for your income to be steady or increasing over the 2 years.

Insured stated-income mortgages allow for a low 10% downpayment but require default insurance. A good credit score is a key requirement, and a low credit score must be mitigated with either an increased income (lower debt-to-income ratios) or a higher down payment (lower loan-to-value ratios) to improve your approval potential. Stated income mortgages are not insured by CMHC but by one of the private mortgage default insurers, Canada Guaranty or Sagen.

Some general rules for stated income mortgages:

Lenders usually won’t double your line 150 income. For example, if you show $50,000 on line 150, you could get away with stating $100,000 to qualify, but no more than that.

You must 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 - owner-occupied only.

You have to have at least 10% down for this program. (Depending on the lender)

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 on your credit score over the last 12 months. No exceptions.

You cannot have any taxes owing to the CRA, and your taxes must be filed/up to date.

CMHC Lending for Self-Employed Mortgages:

CMHC recently announced a new lending program for self-employed borrowers with 2 years or less of history. Usually, a lender requires a 2-year self-employment period to qualify you. CMHC, however, is filling a gap in the market. If you worked as a full-time employee for several years but recently moved to incorporate and do contract work, your tax return may reflect a lower income than what you make. With the new CMHC program, you can extrapolate what you could make based on contracts and bank statements, not the Government of Canada tax returns.

Self-Employed Mortgage Lenders:

Many subprime private lenders (often called B-Lenders) offer self-employed mortgage options in Canada, each catering to different risk profiles and financial situations. Prime lenders uphold strict lending criteria, while subprime lenders provide flexibility for individuals with unconventional income sources or credit challenges.

Private Lenders:

Private lenders can be individuals, groups or corporations that lend money privately. They set their own terms and conditions for the mortgage approval process, as government standards do not regulate them. Private mortgages are typically a last resort for borrowers who cannot meet the typical risk requirements of A and B lenders. Interest rates are typically much higher than A and B lending solutions and usually come with lending and broker fees. Mortgage agents and brokers typically require private mortgages to include an exit strategy for the borrower, as these solutions are only used for temporary financing.

How a Mortgage Agent Can Help:

Navigating the complexities of self-employed mortgages requires a deep understanding of income verification methods, lender options, and documentation requirements. By leveraging the insights in this guide, self-employed individuals can confidently explore mortgage options tailored to their unique financial circumstances, unlocking the path to homeownership with clarity and empowerment.

Ready to explore mortgage options tailored for the self-employed? Schedule a consultation and discover how we can help you secure the ideal mortgage for your homeownership journey.

Self-employed Canadians face a different mortgage qualification process than salaried borrowers, income verification works differently, lender appetite varies significantly, and the way your business is structured on paper can affect what you qualify for as much as what you actually earn.

Colin has worked with self-employed clients across a wide range of industries and income levels and understands which lenders view self-employed files favourably and how to present an application that reflects the full picture of your financial capacity. There are far more options available to self-employed borrowers than most banks suggest.

Colin Ballantyne is a Mortgage Agent Level 2

Licenced with BRX Mortgage (FSRAO Licence 13463, Licence ID M22000539), serving clients across Oakville, Burlington, Milton, Mississauga, and Ontario-wide.