How to Get a Mortgage if You’re Self-Employed
If you’re self-employed, you’re definitely not alone. Over the last couple of decades, self-employment levels in Canada have risen greatly, with over 2.9 million Canadians leaving the traditional workforce in 2018 alone. Through the advent of unconventional jobs with different ways of working, Canadians have the freedom to explore more than just the usual job structures.
Currently, 15% of the nation are self-employed, which is a pretty big chunk of the population. Although there are a lot of benefits to being self-employed, it does come with its own hurdles. Getting approved for self-employed mortgage loans isn’t impossible, but it is relatively difficult compared to other kinds of mortgage loans. Canada’s big banks and companies have implemented several strict lending rules, while the Canadian Mortgage and Housing Corporation (CMHC) discontinued mortgages for the self-employed unless verified by a third party.
This is simply because there is a higher risk associated with lending to those with unpredictable, varying, or unreliable streams of income. That being said, awareness of some strategies to implement can definitely guide you on your way. Here is how to get a mortgage if you’re self employed.
Why is it difficult for self-employed workers to get mortgages?
Despite the increasing number of self-employed workers, getting approved for self-employed mortgage loans is getting more complicated. The Office of the Superintendent of Financial Institutions (OSFI) released guidelines in 2014 that called for federally chartered lenders to inspect self-employed buyers even more closely. Simply put, the 2014 B-12 bill puts a usually simple process under more scrutiny, making it harder for self-employed workers to prove their income.
While salaried employees are easily able to get a mortgage by showing documents such as a T4, letter of employment, and recent pay stubs, these documents are often not available for most people who work for themselves.
What documents do I need to get approved?
Self-employed individuals usually utilize stated income applications to aid them in their mortgage application process. Stated income applications are used by borrowers who cannot portray their income in the usual manner or using traditional avenues. This application requires a signed income declaration and proof of self-employment, and is formulated based on how much individuals claim to earn.
For your stated income application to be accepted, lenders will need you to provide the following supported documentation as well:
Income tax returns. These need to date back the last two to three years. Additionally, your tax returns need to be showing profits (even minor profits help) because if they point out a loss in revenue, then most lenders will not look favourably upon your application.
Notice of assessment. The Canada Revenue Agency (CRA) will provide you with a notice stating that you do not have any outstanding tax payments. This helps prove to lenders that you’re a reliable borrower.
HST and/or GST payment proof.
Copy of your business license, or articles of incorporation work as well.
Expected revenue predictions. These are documents that demonstrate your expected revenue for the next few years, and will come in handy to prove your income is stable and consistent.
Down payment of 10-15%.
Business ownership. This is evidence to support how much of the business you own.
Bank statements. You will also need to provide bank statements (both business and personal) for the past 6-12 months to prove revenue and earnings.
That’s a lot of documents! Our team at Canadalend.com has helped countless self-employed workers get approved for mortgage loans, and we have a few additional recommended documents. It is beneficial for self-employed workers to have a good credit score in addition to the required documents; you can check your credit score online easily with a credit bureau like Equifax or TransUnion. A debt service ratio measures borrowers’ ability to make monthly debt payments on time, and is also usually reviewed before an approval. So, be sure to check your ratio to make sure you’re on the right track to get easily approved for a self-employed mortgage loan.
How are self-employed individuals classified?
There are many definitions as to what constitutes as self-employed, but such individuals range from being business owners and IT contractors to doctors and freelancers. Owning a farm or rental properties can also classify as being self-employed. The different business structures that self-employed individuals are classified under are what is important in getting mortgage approval and loans.
A lot of lenders will classify self-employed individuals in various groups based on business type. You could get classified under the commission sales, corporations, sole proprietors, or partnerships group, and this directly affects your mortgage approval or rejection. For example, owners of incorporated businesses pay themselves a salary, and are easily approved for self-employed mortgage rules, as their salary structure is more traditional. Thus, unincorporated businesses and sole proprietorships can benefit by incorporating, although it is best to speak to a certified professional in the business.
What Non-Traditional Lenders Can Offer
Stricter lending rules are squashing the home-ownership dream for so many Canadians. The tightening of the CMHC guidelines don’t take into account the struggles of entrepreneurs, and this trickles down into the lending rules of Canada’s big banks. Instead of struggling to get approved with strict lending rules, consider turning to those who work with private mortgage brokers. This makes the process easier for many self-employed workers because it allows potential borrowers the chance to secure a mortgage without the stress of rejections and with more specialized support. Working with non-traditional lenders will grant you access to hundreds of different lenders, many of whom specialize in lending to those who are self-employed and may not qualify for the banks’ stricter terms.
Whether you’re a commission-based employee or a business owner, if you’re struggling to get approved or don’t know where to start, then our team at Canadalend.com is here to help. Our mortgage brokers are knowledgeable and with years of experience with self-employed individuals, we are qualified to help you in your unique situation. From creating a plan of action to making sure you get specialized services and great mortgage rates, our brokers will guide you throughout your home-owning journey.