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How to Get a Mortgage If You’re Self-Employed

Financial reward, independence, and freedom are just a few of the benefits of being self-employed. Faced with a mediocre job market, more Canadians are looking to self-employment as a way to make ends meat – it’s estimated that as much as 16 per cent of Canada’s workforce is self-employed.

Although self-employment has it perks, it also has its drawbacks. Not only do you have less job security and fewer benefits, you’ll have to jump through hoops just to qualify for a mortgage. While Federal Finance Minister Jim Flaherty’s mortgage tightening rules made it difficult for first-time homebuyers to qualify for a mortgage, that’s nothing compared to the how difficult it is for self-employed individuals to obtain a mortgage.

What is a Self-Employed Mortgage?

When you apply for a mortgage, lenders assess you based on three main criteria – income, net worth, and credit score. If you’re a salaried employee with a steady job, a decent credit score, and you’ve saved up a down payment of at least 20 per cent, qualifying for a mortgage should be a cakewalk. If you’re self-employed it’s another story.

When you’re self-employed, you have the challenge of proving you have the capacity to repay your mortgage. For self-employed individuals, your livelihood is your business. Normally when your business is struggling you can forgo taking a salary, but when you have a mortgage to pay, that’s no longer an option (if you don’t want the bank to foreclose on your home).

How Do I Qualify for a Self-Employed Mortgage?

Before you start house hunting it’s a good idea to get pre-approved for a mortgage. You’ll need to provide documentation to your mortgage lender as proof of your earnings. When you work for an employer, it’s as easy as providing a copy of your T4 slip, but when you’re self-employed it’s not so easy.

Self-employed individuals need to rely on stated income. As the name suggests, stated income is how much you claim to earn. Of course lenders won’t just take your word for it – you’ll need to provide proof in the form of financial statements, client contracts, and recent tax returns.

What Mortgage Lenders Are Looking For

Not all self-employed individuals are created equal. A small business owner with stable earnings over several years is more likely to have an easier time qualifying for a mortgage than a freelancer whose income fluctuates from month to month.

Mortgage lenders are looking for a lot of the same things from self-employed individuals as they do from other borrowers. Steady rental history, a decent credit score, and low debt ratios are all considered golden in the eyes of lenders. It also doesn’t hurt to have a down payment of 20 per cent, as opposed to the minimum down payment of five per cent.

Having a spouse who is a salaried employee can help you when applying for a mortgage. If you’re having issues qualifying for a mortgage, your spouse can always co-sign to lend you a helping hand.

How Do You Prove Your Stated Income

Self-employed individuals will need to supply a lot more paperwork to qualify for a mortgage. Here is some of the documents mortgage lenders request most often:

• Income tax returns and notices of assessment for the last two to three years
• Financial statements
• Client contracts, including forecasted income for the coming fiscal year
• Your personal and business’s credit scores score
• Proof of asset ownership

Conclusion

As you can see, the road to homeownership is a lot more difficult one if you’re self-employed. It’s important to remember that homeownership isn’t for everyone – if your income varies a lot month to month, it might be worth renting instead.

Are you a self-employed individual or small business owner? Have you ever had difficulties obtaining a mortgage?

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

{ 6 comments… add one }
  • Sarlock March 14, 2014, 12:12 pm

    I had to go through a lot of hoops to get a mortgage as a self-employed person. Financial statements for the company, among many other things. It took about three weeks to be approved, during which I was continually asked for additional information.

  • Benjamin March 16, 2014, 2:15 pm

    I question whether the author of this article has ever applied for a mortgage as a self-employed person. I did so this past fall after 7 years of being self-employed. I had absolutely no issues getting my mortgage – and all I had to provide was my income tax statements from the past three years. I ended up with a mortgage at a bank with which I had no prior history, as well – and still, there was no demand for additional documentation beyond my tax statements.

    To address a few other aspects of this article: my income fluctuates every month, and I am a freelance writer. None of that was a challenge to getting a mortgage with a 5 percent down-payment.

    I also question the statement that being a freelancer somehow offers ‘less’ job security than being employed full-time. I have four different companies sending me checks every single month. If one of them leaves, there’s three others in their place. How many different companies does a full-time employee get paid by every month? It’s called diversification, and it’s a far better risk-mitigation strategy than full-time employment.

  • Marc March 19, 2014, 1:03 pm

    There are many self employed programs offered by different lenders. Some will only require you to confirm your 2-3 year average earnings, if you’ve been self employed or have working in the same role/field for at least 2 years. This is the least complicated program, and will require the least amount of paperwork (most often times just the line 150 on your most recent notice of assessment (NOAs), to confirm average declared income and that you have no taxes owing). The one that takes more paperwork and often times puts a premium to be charged on your mortgage (either by charging you a higher interest rate or additional premium on the high ratio/cmhc insurance) is the self employment program that cannot confirm self employment income via NOAs. The lenders will need to see additional paperwork to establish the reasonability of what you are stating as a take home income. This is normally useful for people who deals with lots of cash income. Best to contact a good mortgage broker who can help you navigate many programs available or applicable to you.

  • Benjamin March 19, 2014, 7:00 pm

    Marc – this is good advice, and expands past the broad strokes of this article’s author, who appears to have excused himself from the conversation.

    It’s worth noting that as a self-employed person, I had no need to make use of a self-employed mortgage program. I have a standard mortgage. There was one lender who did suggest this type of program to me.

  • Carla March 23, 2014, 2:31 am

    Looks like Benjamin was lucky or had a really good mortgage broker. I am an A applicant, excellent credit, substantial assets, 25% down and it was a real hassle getting a mortgage. High rate, fees and kept asking for more and more paperwork! Done deals before pretty well on a handshake, the rules certainly have changed.

  • Benjamin March 23, 2014, 2:43 pm

    I assure you it was not luck, nor did I use a mortgage broker. I went to two lenders – my own bank that I had been with for 20 years, and a second bank. My own bank wanted me to halve the limit on a line of credit that I had, which I was not willing to do. The second bank – CIBC – offered me a better interest rate on my mortgage and zero conditions.

    It helps that I have absolutely no debt. But that fact is not related to the fact that I am self-employed.

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