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If you’ve ever dreamed of pursuing self-employment, you’re definitely not alone! Did you know that 20% of Canadians are self-employed? Ditching the standard 9-5 career and breaking free from the corporate red tape can bring with it many benefits, but it can also present some hurdles you may not have originally considered. When it comes to buying a home, standard mortgages can present some unique issues for anyone who’s self-employed. Income isn’t always as easy to prove and while many businessowners work hard to expense as much as they can to offset their tax costs at the end of the year, many lenders don’t take this into account. Learn more about what a self-employed mortgage is and what options you have as a self-employed Canadian when it comes to buying a home.
What Is A Self-Employed Mortgage?
Self-employed mortgages are specifically for borrowers who rely on self-employment income or business income instead of employment income. When you’re self-employed, your income will be different from regular borrowers who are receiving consistent and predictable paycheques biweekly.
When you apply for a traditional mortgage, the lender will look at the net income that you declared on your last tax return. For those who are self-employed, this amount can be much lower due to tax deductions and claimed expenses. A self-employed mortgage takes those differences into account and provides more flexibility with how your income is reported.
A self-employed person is someone who works for themselves and does not earn a fixed salary or wage from a third-party employer. The title includes businessowners of sole proprietorships, partnerships, and corporations. When it comes to incorporated self-employed individuals, they are considered to be self-employed if they own the corporation and earn a salary from it. Shareholders who are not employees of the corporation and only receive a dividend are not self-employed.
Pros Of Getting A Self-Employed Mortgage
There are plenty of pros when it comes to opting for a self-employed mortgage:
You’ll get access to competitive rates
Self-employed mortgages are specifically designed to help self-employed Canadians buy a home. If you can save up a proper down payment, provide a high enough stated income or secure insurance through the CHMC mortgage program, you’ll be well on your way.
You can qualify for a higher mortgage amount
If you plan to work with a lender that accepts stated income mortgages, you stand a chance of getting approved for a higher amount than you would if you went through a traditional mortgage application.
The approval process is quite efficient
Unlike the traditional waiting game with regular mortgages where you play a back-and-forth game for weeks on end, you can get approved for a stated income mortgage in a matter of hours.
You can save a lot of money on taxes
With a self-employed stated income mortgage, you can save on your taxes while also qualifying for competitive fixed and variable mortgage rates and higher mortgage amounts in general than going through the traditional avenues.
Cons Of Getting A Self-Employed Mortgage
As with any financial option, it’s important to understand the cons before you make any big decisions:
You may not qualify at your bank
While some “A” lenders (the six major banks in Canada) offer self-employed mortgage products, they won’t necessarily check all the boxes for you so there’s a good chance you may have to apply at a financial institution or lender you’ve never used before.
Higher rates than conventional mortgages
Since the lenders for self-employed mortgages are taking a greater risk by working with a borrower who has less consistent income, their rates will reflect that. If you have a poor credit score or a lackluster financial portfolio, it could further affect your accessible rates.
Types Of Lenders That Offer Self-Employed Mortgages
There are multiple types of lenders that will offer self-employed mortgages but it’s important to note that not all offerings will be the same across the board. “A” lenders are very strict with their mortgage qualifications so while they may offer some self-employed mortgage products, they’ll likely be a lot more strict with their applications and requirements than, say, a “B” lender or a private lender. Before you choose a lender, take a look at the options below and make a list of things that are important to you as a borrower. Whether it’s flexibility, a lower down payment requirement or access to better rates, this list will help you choose a lender that’s best suited to your needs in the short- and long-term.
Different Mortgage Types For Self-Employed
When it comes to mortgages as a self-employed Canadian, you may have more options than you think. It’s important to understand how each of these options works, what its pros and cons are and how it can work for your specific situation.
Stated Income Mortgages
Stated income mortgages require a large down payment (35% or more) as they operate in a much different manner than traditional mortgages. With a stated income mortgage, your lender doesn’t verify your income, and instead, asks that you declare or state your income. You won’t be required to provide any documents to prove this income, you’re just asked to ensure your stated income is reasonable based on your business and industry.
Depending on which lender you’re approaching, different rules may apply. In general, it’s unlikely that you’ll be able to get a stated income mortgage from a bank like TD or RBC without income verification.
Insured Stated Income Mortgages
If you don’t have the cash to make the large down payment required for a stated income mortgage, you’ll need to pay insurance premiums as the lender is taking a big risk with this loan. If you opt for an insured stated income mortgage, you can make a down payment of as little as 10%, but you’ll need to have a good credit score. You’ll need to opt for a private mortgage default insurer, as CMHC doesn’t insure stated income mortgages.
Sagen – Business for Self (Alt. A)
Formally known as Genworth Canada, Sagen’s program allows self-employed Canadians to get a mortgage without income verification. Keep in mind you’ll still need to verify the history and operation of your business and prove it’s been operating for a least 2 years. The program is only available for owner-occupied properties so you can have owner-occupied rental properties up to two units with one being occupied by the owner. It doesn’t apply for vacation rentals, other rental properties and second homes.
If you have a previous bankruptcy or work as a self-employed commission salesperson, you don’t qualify for this program.
These lenders consist of the six largest banks in Canada: CIBC, RBC, TD, Scotiabank, BMO and National Bank. They will generally have the most strict lending criteria which will require you to pass what they call a Mortgage Stress Test to prove you have stable income and a good credit history. Some of these lenders have specific mortgage products for self-employed individuals while others don’t have unique applications for self-employment but will consider all applicants regardless of employment.
“A” lenders will offer fixed and variable rate mortgages and each will have their own minimum down payment, maximum loan requirements. If you plan to explore the options offered through these lenders as a self-employed individual, you’ll need to have your Notice of Assessment for 2 – 3 years prior, financial statements and articles of incorporation (if you’re incorporated).
These lenders consist of creditors like Equitable Bank, Home Capitol, MCAP, Merix Financial and Street Capital Financial Corporation. As mentioned above, “A” lenders have strict criteria so there’s a good chance you may not be a good fit for their mortgage products. “B” lenders typically have less strict requirements because they’re not subject to as much regulation as the “A” lenders. That being said, they often have higher rates as well since they’re often taking more of a chance on the borrower due to those less strict qualifications.
If you’re considering exploring your “B” lender options, you’ll typically have to go through a mortgage broker who will let you know what is required for your unique circumstances and help you navigate the process.
Seeking out a private lender should be a last resort as their interest rates are generally very high (7% – 18%). You’ll also have to factor in the cost of broker fees and loan set-up fees which could set you back another 1% – 3%. Since private lenders are part of the unregulated mortgage market, their approval process is much less strict than “A” and “B” lenders. Just be warned that what you may gain in flexibility, you may ultimately lose in interest.
Self-Employed Mortgage Qualifications
When you apply for a self-employed mortgage in Canada, there are certain qualifications you’ll need to meet and criteria you’ll need to follow in order to get approved for a mortgage.
No matter which mortgage you apply for, you’ll have to provide income verification in one form or another. There are typically three different types of income verification:
1. Traditional income verification: Your employment income is verifiable through your tax returns)
2. Nontraditional income verification: Looking at your business’ financial statements and bank statements to prove actual income
3. Stated income: You’re not able to verify your income
Mortgages with traditional income verification will always have the lowest mortgage rates and down payment requirements because they’re the least risky. Nontraditional income verification will come in slightly higher and may also require mortgage default insurance. Stated income will have the highest mortgage rates of all three options with much larger down payment requirements and property restrictions.
Mortgage Loan Amount
Each lender/financial institution will have different requirements when it comes to the mortgage loan amount they’ll cover. Some, like National Bank of Canada, will cover up to a certain amount dollar wise ($600,000) whereas others like BMO will cover up to 80% of the amount with no default insurance and up to 95% with the insurance. To learn more about what your financial institution or lender of interest will provide in terms of loan amounts, be sure to reach out in advance.
Minimum Down Payment
When it comes to the “A” lenders, minimum down payments can range from 5% with default insurance up to 30% with no default insurance. If you’re opting for a stated income mortgage, you can expect your down payment requirement to be much higher (35%) as your loan is a lot riskier to the lender. Before you figure out how much to save for a down payment, do your homework to choose which mortgage option is best suited for you. This way you can ask all the necessary questions in advance and get some insight into what your options will be, which will help you determine how much money you’ll need to save for a down payment.
CMHC Self-Employed Mortgage Insurance
CMHC’s self-employed program provides mortgage loan insurance for self-employed borrowers. As long as you can verify your self-employment income, you’ll be treated the same as all other borrowers in the eyes of CMHC. The main difference with CMHC is that unlike Sagen and Canada Guaranty, they don’t allow stated income mortgages. You’ll need to have been in business for 2 years and will be required to provide your Notice of Assessment, GST returns, credit reports, financial statements, business license, etc.
You will have the same premiums and qualification criteria as employed workers:
Maximum LTV/Minimum Down Payment: You can borrow up to a 95% loan-to-value (LTV) or make a down payment as low as 5% for the first $500,000 and 10% for the remainder
Maximum Loan Amount: The price or value of the property must be less than $1 million
Minimum Credit Score: The required minimum credit score is 600
Maximum Debt Service Ratios: The maximum Gross Debt Service Ratio (GDS) is 39% and the maximum Total Debt Service Ratio (TDS) is 44%
Maximum Amortization Period: 25 years
CMHC self-employed mortgages can be owner-occupied or nonowner-occupied properties with up to four units. If the units are not owner-occupied then a down payment of 20% is required.
As you move through the mortgage application process, you’ll want to make sure you have these documents at the ready:
– Business registration number
– GST/HST account number
– Articles of incorporation (if incorporated)
– Notice of Assessment from the past 2 – 3 years
– Financial statements
– Bank statements
Keep in mind that required documentation will differ depending on your bank or lender’s requirements so be sure to do your homework and ask any necessary questions about documentation in advance.
Mortgage financing as a self-employed Canadian doesn’t have to be a stressful experience. There are plenty of different options that are tailored specifically to self-employed individuals and are designed to get you into your dream home as quickly and efficiently as possible. If you’re a self-employed Canadian and you’re thinking about buying a home, we can help! Contact our team to get the conversation started and learn more about your options.