Self-Employed Mortgages

Author:

Being self employed can often present a few mortgage challenges that traditionally-paid employees don’t have when looking for a mortgage, such as:

  1. Being able to prove your income – without a traditional T4 slip from an employer, it’s more challenging for self-employed income verification.
  2. Being able to show you make enough income to qualify – often self-employed people have good tax accountants that write-off as many expenses as they legally can, resulting in a smaller amount of income stated in your personal taxes. Lenders are given a false impression of your earning potential, and may only be able to qualify you for a smaller mortgage.

Thankfully, as more and more Canadians are becoming self employed, more lenders are keeping these challenges in mind, and offering affordable self-employed home loans for self-employed people. 

What is a self-employed mortgage?

A self-employed mortgage is a type of home mortgage specifically designed for individuals who work for themselves, and it accounts for the challenges of inconsistent income and lower personal income reporting when qualifying individuals. 

Who is considered self employed?

Self employed people include entrepreneurs, freelancers, independent contractors, and small business owners.The company may be a proprietorship or incorporation.

What are the differences between getting a self employed mortgage and a traditional mortgage?

The biggest difference comes down to being able to prove your income.

A traditional mortgage is typically offered to individuals who have a stable income and can provide proof of employment. Self employed people have a harder time proving their income due to the more inconsistent nature of their pay, or due to write-offs, and therefore need special and unique mortgage options just for them.

Due to the challenges of trying to prove your income, additional documentation for self-employed mortgages is required to support your income claims.

What documentation do you need for self employed home loans?

There are a number of ways a self employed person can prove their income. Here are the types of documentation self-employed mortgage lenders may require.

Income Tax Returns

Proof of income can be achieved through submitting two years of income tax returns (some lenders may require three years), including full T1 Generals.

Notice of Assessment

You may also need to provide your Notice of Assessment (2 years) from the Canada Revenue Agency (CRA). 

Bank statements

Bank statements from your business account and T2 Corporate income tax return (if you own a corporation) can help provide support for your income claims. 

Financial statements

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. 

Signed contracts

Future income from signed contracts can be included as well. These can help solidify your income to show future earnings.

Proof of business

You will be required to provide proof of business, demonstrating the legitimacy of your self-employed status, like your articles of incorporation (if you have a corporation), business number registration, or GST/HST account number.

Other documents

Other documents that might be needed include invoices, proof of business assets and a few other items specific to your lender.

Credit history

Having good credit history can significantly increase chances of approval. If you have a less than good credit history you may be required to have a higher down payment or the interest rate may be a bit higher. There are still good solutions that can help.

When working with us, we’ll walk you through the exact documentation you’ll need based on the lender that is best for you.

How do self-employed people verify their income with lenders?

Without traditional provable income, there are a few other options for showing your income to self-employed mortgage lenders.

Stated Income

A stated income program generally uses 6 – 12 months of your business bank statements to total all the deposits into your account. The top expenses are then deducted to determine your income. You then provide several invoices to match the deposits so the lender can confirm they are legitimate. This can help to qualify you for a much larger amount than you would qualify for by using your claimed income.

Non-Traditional Income

As your personal tax return is not a reflection of your actual income, your business’s bank statements and financial statements as mentioned above can be used to verify real income. 

Declared Income

This is otherwise known as “no income verification mortgages”, and basically implies that the above method doesn’t work for income verification. This verification method is mainly accepted by B Lenders and private lenders. Some A Lenders permit it under certain circumstances.

Declared income  is essentially the process where a borrower declares their income without submitting any proof or documentation to verify it. It allows borrowers to declare their income based on their own assessment, without requiring income tax returns or pay stubs.

While this approach offers convenience and flexibility, it also comes with added risks for both the borrower and the lender. Declared income loans are often associated with higher interest rates and less favorable terms because of the increased uncertainty surrounding the borrower’s income. 

As mortgage specialists, we’ll know the right way to represent your income, to ensure you’ll qualify for as much as you can.

Are self-employed mortgage rates higher than traditional mortgage rates?

Self employed mortgage rates may be higher than a regular mortgage, but it’s based on a number of factors:

  1. Income variability: Self-employed individuals often have variable income, which can be less predictable compared to those with stable employment. Lenders may view this variability as a higher risk of default, which could lead to higher rates.
  2. Documentation challenges: Self-employed individuals might have more complex financial situations and find it challenging to provide their income documentation. This can make it harder for lenders to assess their ability to repay the loan, leading to increased rates as compensation for the uncertainty.
  3. Limited proof of income: As mentioned above, self-employed individuals might take advantage of tax deductions to lower their taxable income, but this can also limit their provable income for mortgage qualification. Lenders might use a different income calculation, which could impact the interest rate.
  4. Complex underwriting: Lenders often need to conduct more thorough underwriting for self-employed borrowers, which requires more time and resources. These costs may be passed on in the form of higher rates.
  5. Lack of employment stability: Traditional employees often have more predictable job stability, while self-employed individuals might face periods of low income or even business closure. Lenders consider this uncertainty when setting rates.
  6. Historical loan performance: Lenders may have data that indicates self-employed borrowers have a slightly higher default rate compared to traditional borrowers, influencing their decision to charge higher rates.

Thankfully, our expertise with many different kinds of mortgage lenders will help present your unique financial situation in the best light, to ensure your mortgage rates are the lowest they can be. 

If you’re looking for self-employed home loan advice and options, we’d love to speak with you and help you find the right kind of mortgage for your unique situation.