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When you’re self-employed, dealing with fluctuations in your income can be tough. What’s even tougher in some cases however, is trying to get a mortgage without a regular paycheque. Here’s what you need to know about getting a mortgage in Canada when you’re self-employed.
Even though more than 2.6 million people in Canada are self-employed, getting a mortgage when you work for yourself can still pose some challenges.
There are two big reasons for this:
Self-employment can make your income hard to verify.
Traditional lenders like banks want to see income stability. Even if you can demonstrate a steady income (from retainers or contract agreements, for example) many still require standard paystubs and proof of employment for the previous two years.
Your income may appear lower than it actually is.
If you’re a contractor, freelancer, or sole proprietor, odds are you try to maximize business expenses so you can minimize your taxable income. This can reduce your annual tax bill—but it also makes it harder to get a mortgage approved.
The good news is that you can absolutely still qualify for a mortgage when you’re self-employed if you can meet certain criteria.
Lenders take a number of factors into account when they evaluate your ability to pay back a mortgage loan. In addition to your income, for example, they also consider your credit score and the size of your down payment.
Some lenders will accept tax returns (or Notices of Assessment) from the past two or three years as proof of your self-employment income—especially if you can also provide:
So long as you have some form of income—and can prove your ability to afford a mortgage—it’s worth approaching different lenders about what documentation they’ll accept to process your application and get you approved.
Just like they would with any borrower, traditional lenders will carefully check your financials when you apply for a self-employed mortgage.
To ensure you meet prescribed standards for loan eligibility, they’ll consider factors like:
Your credit.
Checking your credit report shows lenders how well you’ve managed any credit and how much debt you currently have
Your collateral.
This includes your cash holdings, bank account balances, and assets like vehicles or other property you own
Your capacity to support a loan.
Banks consider a range of financial information, including your income, expenses, tax history, and stress test results (this test helps determine whether you could still afford your mortgage if interest rates increased or your financial situation changed)
Although showing sufficient, verifiable income is likely to be the weakest link in your mortgage approval process, there are some things you can do to strengthen your application.
Here are three easy steps you can take to improve your chances of getting approved for a mortgage as a business owner or self-employed worker.
1. Bring your tax filings up to date.
Make sure you file any and all tax reports you’re responsible for before you apply for a mortgage. This will make it easier for lenders to evaluate your business and professional activities.
2. Pay all tax amounts you owe.
This includes both income tax and any sales taxes you’re required to collect (like GST, HST, or PST).
3. Get your paperwork in order.
Gather and organize your tax returns, Notices of Assessment, bank and financial statements, business licenses, credit reports (business and personal), and any current work agreements or contracts you have so they’re ready to present to a lender.
If you can’t provide sufficient proof of income, you might also consider applying for a stated income mortgage (a loan that doesn’t require traditional income verification) instead.
If you’ve verified your income to get approved for a mortgage, you’ll be subject to the same mortgage insurance rules as non-self-employed borrowers:
If, on the other hand, you can’t qualify for CMHC insurance because you lack the necessary documentation to support your self-employment income, you’ll need to:
Only private providers offer mortgage default insurance for stated income mortgages.
Being self-employed can sometimes make getting a mortgage more difficult. On the upside, today’s diversity of lenders means there’s a wider range of mortgage products available. So long as you have a good down payment and credit score—and can provide proof of your income—you should be able to access the same loans and rates as other borrowers.
If you can’t verify your income, but you have a good credit history, you can apply for a stated income mortgage. Stated income mortgages have higher interest rates, however, and require a bigger down payment (at least 10%).
In most cases, yes. Mortgage brokers have broad market knowledge and access to a variety of lenders offering a wide range of terms—including many that specialize in mortgages for the self-employed.
It can often be easier to get approved for a private mortgage when you’re self-employed because private lenders emphasize property value over credit score or verifiable income. They’re also more likely to offer stated income mortgage loans. Most charge considerably higher interest rates, however, along with additional lender fees.
