The 2022 federal budget made way for a new tax-free savings account (TFSA) designed specifically for first-time home buyers in Canada. The account ultimately combines the advantages of the existing TFSA and registered retirement savings plan (RRSP) – popular down…
A recent report from Statistics Canada shows that there are over 2.6 million self-employed Canadians who do not take payment from an employer. This figure, which makes up for about 15% of the Canadian workforce, enjoys the various benefits that determining your own schedule brings about.
However, one major challenge they face comes during the process of buying a home. Traditional mortgages typically demand certain requirements that can mainly be met by people who have an employer, one of these being proof of stable income.
Now, this doesn’t imply that it is impossible to get a mortgage while self-employed. You don’t necessarily have to enter into the conventional workforce in order to buy a home. So, can I get a mortgage being self-employed? Yes, you can. With a self-employed mortgage, you can keep your career and buy the home of your dreams.
- A self-employed mortgage is specifically tailored to meet the needs of self-employed Canadians because most cannot qualify for traditional mortgages
- These mortgages are offered by A Lenders, B Lenders, and private mortgage lenders
- Qualifications for a mortgage vary from lender to lender, and most A Lenders require proof of stable income, which can be difficult for the self-employed to provide
- A self-employed mortgage is a non-traditional mortgage and usually requires borrowers to pay mortgage insurance
What is a Self Employed Mortgage?
Self-employed mortgages are specially curated for borrowers who earn income from their business or self-employment rather than from an employer that pays a salary. The base difference between both is that self-employed individuals typically have an inconsistent income while employed individuals get a bi-weekly or monthly paycheck consistently at regular intervals.
During a standard mortgage application process to get a traditional mortgage, the lender considers your net income from your last tax return. Self-employed individuals usually have a lower figure as a result of claimed expenses and tax deductions. A self-employed mortgage Canada considers this factor and usually allows the prospective borrower some flexibility when reporting their income.
A self-employed mortgage is a non-traditional mortgage and can be accessed by people who run full-time or part-time businesses comprising partnerships, incorporations, and sole proprietorships. For incorporated self-employed individuals, they must own the corporation and draw a salary or dividend from it to be considered self-employed.
Getting a Mortgage When Self-Employed
To qualify for a self-employed mortgage, you must have held the same occupation or operated your business for a minimum of two years. In essence, you can assess mortgages for self-employed with two years accounts. Certain lenders or circumstances may require up to three years; however, the more common requirement is two years. This answers the ‘how long self-employed to get a mortgage’ query.
Similarly, you would need to present personal tax Notices of Assessment for at least 2 to 3 years prior alongside the mortgage application. Presenting this proof of income may enable you to enjoy the same products and rates enjoyed by traditional borrowers, which differs from self-employed mortgage rates.
Individuals with less-than-good credit history would be required to pay 10% or higher as a minimum down payment as against the regular 5%.
Types of Self-Employed Income Verification
There are three major verification types based on the income declared:
- Traditional Income
- Non-traditional income
- Stated income
Traditional income under which regular employment income is classed can be verified via personal tax returns. This verification type would likely not work for most self-employed business owners looking to confirm their “real” income.
Here, the personal tax return is not a reflection of actual income. Rather, it’s the business’s bank statements and financial statements that can be used to verify real income. This is the category where most self-employed individuals fall. Most first-time buyer contractor mortgages fall in this category as well.
This is otherwise referred to as “no income verification mortgages.” It basically implies that neither of the above methods works and the borrower would be unable to verify their income. This verification method is mainly accepted by B Lenders and private lenders. Some A Lenders permit it with the Sagen Alt-A Program, however, this program is extremely strict.
Note: Generally, borrowers who are able to verify using the traditional income method get the least down payment requirements and pay less in mortgage interest too. Non-traditional income confirmation requires paying extra in the way of down payment, features a higher mortgage rate, and may include mortgage default insurance as a requirement. Stated-income mortgages come with restrictions on the property that can be purchased and feature the highest mortgage rates and a down payment of all three methods.
Required Documents for a Self Employed Mortgage
A self-employed mortgage fundamentally requires your Notices of Assessment and Income Tax Statement (T1); this is the basics for how to qualify for a mortgage when self-employed.
Depending on the lender, you may be required to provide the following:
- Personal and business credit scores
- Financial statements for your business
- Proof indicating full payments of your HST and/or GST
- Proof of principal ownership in the business
- Contracts showing previous and potential/expected revenue for the next couple of years
- Copy of GST license or Article of Incorporation proving that you are licensed or a copy of your business license
- Evidence indicating that your down payment was not a gift
Dividend income for a mortgage is allowed, as well as traditional investment income provided you are able to demonstrate a 2-year stability period as well as show a guarantee of continued income through the mortgage term.
Here are four major requirements that all lenders would typically request:
Notices of Assessment and Income Tax Statement (T1)
Dated 2-3 Years Previous
Lenders mandate submission of your Notice of Assessment and Income Tax Statement (T1) because it typically contains your entire income comprising self-employment income that is reported as business income as well as any unpaid taxes.
Unpaid taxes can cause the Canada Revenue Agency (CRA) to register a lien on your home and carry out a seizure and sales of assets if you are unable to pay off your debts.
Therefore, lenders consider unpaid taxes a red flag and would review your Notice of Assessment or T1 General income tax returns for the last 2-3 years at least to check for any.
Articles of Incorporation, Business Number Registration, or GST/HST Account Number
This usually provides information about the duration of time you have been self-employed or been running your business. Articles of incorporation are limited to corporations. Also, provided you make an excess of $30,000 in a quarter of an entire calendar year as revenue or gross sales, you are required to have a GST/HST number.
Bank statements from your business account, as well as your T2 Corporation income tax return, can serve as additional proof to solidify your business income claims. Future income from signed and sealed contracts can be included as well.
Financial statements can also be used to prove business income. This is especially useful during non-traditional income verification, where you want both your personal income and business income to be considered by the lender.
Self Employed Mortgage Lenders
In Canada, self-employed mortgages are offered by the three major categories of mortgage lenders, namely:
- A Lenders
- B Lenders
- Private Lenders
They comprise the six biggest banks in Canada and take the position of best bank for a self-employed mortgage. A Lenders require that prospective borrowers pass a mortgage stress test to show that they have a stable and sufficient income to cover debts over the length of the mortgage term. It is a way of ensuring that borrowers do not place themselves in a risky position.
Some A Lenders have mortgage products specifically suited to self-employed individuals and they make the best lenders for the self-employed.
This is the next port of call for a self-employed mortgage if you are unable to meet up with the stringent criteria of A Lenders. They are the next best mortgage provider for the self-employed.
This is the last resort, and they definitely do not offer the best mortgages for self-employed first-time buyers. They have very high-interest rates (could be between 7-18%).
Their activities are unregulated and as a result, getting approval is a lot easier. They typically comprise syndicate or group investors as well as individual lenders.
Self Employed Mortgage Conditions & Requirements
Depending on the lender you are opting for, you would be required to meet certain criteria to be considered for a loan. A Lenders are the best mortgage lenders for self-employed, and would typically have more stringent requirements. B Lenders and Private Mortgage Lenders would be more flexible requirements-wise.
Requirements for A Lenders
Discussing the requirements for A Lenders requires highlighting the 5 C’s of credit. These are the major factors that A Lenders consider:
- Capacity: this refers to the borrower’s financial capability to combine mortgage payments with other expenses. Income is an important consideration here and your TDS is reviewed too.
- Character: for fear of sounding cliché, character is everything here too. A lender would typically review information like employment duration, how you have fared with previous payments as well as how many years you have resided at your current home. This is mainly evaluated to check for reliability and
- Collateral: assets or property that you currently own and can borrow against. The lender also considers your down payment as well as the marketing potential of the property. In the event that you default on your loan, the lender wants to know that they can recoup most of their funds from a sale.stability.
- Credit: your credit report is reviewed to determine your nature towards paying back debt. Your credit score is a major determinant too, as well as how long you have managed credit.
- Capital: a simple asset minus liabilities calculation would give you your net worth or capital. This chiefly considers whether you can still be financially stable even in the light of unforeseen circumstances.
You do not necessarily have to have all 5 C’s perfect. A stronger one can possibly make up for a weaker one to an extent. For instance, if your credit score was negatively impacted by student loans or treating an illness, evidence of job stability and/or an increased down payment can mitigate the effect.
Requirements for B Lenders
You would need a mortgage broker to apply for a mortgage with a B Lender. Mortgage brokers are professionals who specialize in finding the mortgage best suited to your needs and financial standing. Your broker is in the best position to and would inform you about the required documentation.
Requirements for Private Mortgage Lenders
Private mortgage lenders evaluate creditworthiness as well as property value. To calculate the amount of mortgage you qualify for under Stated Income Mortgage, private lenders would factor in your gross income. Generally, the requirements are less stringent, and you would be informed by the lender.
What is a Stated Income Mortgage?
A stated-income mortgage is one where the lender skips the income verification stage. All documents related to your finances, such as financial statements or bank statements, and tax returns, would not be checked. For instance, if your earning is commission-based, it might be difficult for you to verify your income. Rather, the lender allows you to “state” or “declare” your income. Your stated figure would then be compared to the average income in your business or industry, and it must be found reasonable.
The downside to this mortgage type for lenders is that potential borrowers may state more than what they actually earn so that they can get a larger mortgage. This mortgage type also requires a significant down payment and default mortgage insurance. To avoid paying mortgage insurance, you may need to part with up to 35% for a down payment. Stated income mortgage Canada is easier to get from B Lenders and private mortgage companies. You can get from A Lenders, however, it is an extremely difficult process.
Insured stated income mortgages allow for a down payment as low as 10% but require payment of insurance premiums. A good credit score is a base requirement here, and bad credit would have to be fixed with an increase in income. Similarly, stated income mortgages are not insured by the CMHC; rather, a private mortgage default insurer like Canada Guaranty or Sagen are the only options.
CMHC Self Employed Mortgage Insurance
Self-employed mortgage lenders are insured by all three insurers in Canada in the event that the borrower defaults on their mortgage. Borrowers making down payments of less than 20% are required by the OSFI to purchase default mortgage insurance in Canada. Certain banks also extend this mortgage insurance to down payments as high as 35%. The upside is that a higher down payment implies reduced insurance costs.
CMHC self-employed borrowers who are able to verify their income get the same treatment as traditional mortgage borrowers in terms of insurance premium, mortgage premium, and qualification criteria. Other insurers accord the same treatment as well. The CMHC Self Employed program also allows self-employed borrowers to access mortgage loan insurance. The basic CMHC requirements are as follows:
- Maximum loan amount of $1 million, which implies that t property must not exceed this
- Maximum loan-to-value (LTV) of 95% or down payment as low as 5% for initial $500,000 and 10% for the remainder sum
- A minimum credit score of 600
- The maximum amortization period of 25 years
- Maximum Gross Debt Service Ratio (GDS) of 39% and maximum Total Debt Service Ratio (TDS) of 44%
The major difference between private mortgage insurance and CMHC mortgage insurance is the income verification required by CMHC.
The CMHC looks at your credit reports, Notice of Assessment, income tax returns, articles of incorporation, or business license, financial statements, and GST returns to verify that you’ve been running your business for a minimum of 2 years. This answers the ‘how long self-employed to get a mortgage’ question.
To verify income, the CMHC requires your T2125 Statement of Business or Professional Activities (which has a record of business income and professional income as well as professional fees and work-in-progress) or your Notice of Assessment and T1 General tax return.
This mortgage type doesn’t qualify as mortgages for low-income earners.
Frequently Asked Questions
Can I get a Self Employed Mortgage if I’m recently self-employed?
You can still qualify for a CMHC self-employed mortgage even if you only just became self-employed and do not have the required 2-year business running history. Sufficient cash reserves, acquisition of an established business, or a great credit history alongside education or training would serve.
The CMHC could take a look at your bank statements, income from previous employment, as well as signed contracts that guarantee future work. So, yes, you can qualify for a newly self-employed mortgage and mortgage self-employed for six months. And can you get a mortgage without an income? Yes. However, you would need a co-signer such as a parent or a spouse who has a high net worth or is employed.
How much can I borrow for a mortgage if I’m self-employed?
Up to 95% with mortgage default insurance and 80% of the home value without. However, mortgage affordability is also a factor here, and as a result, debt service ratio limits apply (39% Gross Debt Service and 44% Total Debt Service). Other expenses and your debts would factor in as well.
Can I get a self-employed mortgage without proof of income?
Yes, you can. Insurers like Canada Guaranty and Sagen allow borrowers access self-employed mortgages without proof of income. You would need to make a minimum down payment of 10% and opt for a lender that works with either of these mortgage insurers.
Qualifying for a first-time buyer self-employed mortgage is, in fact, possible—work towards meeting the requirements of an A Lender or a B Lender at least. Steering clear of private mortgage lenders would help you avoid outrageous interest rates. Furthermore, just like for traditional mortgages, increasing your income, improving your credit score, and being buoyant enough to make a significant down payment boosts your chances of getting a mortgage and allows you to pay back easily in the long run.
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