How a Self-Employed Mortgage Works in Canada?
Business owners are important to our economy. Not only do they provide goods and services that make our lives easier, but they also create jobs and spur innovation. It’s frustrating therefore to see that up until now, many self-employed individuals have had difficulty getting mortgages. This is because when you are self-employed, your income can go up and down like a roller coaster making it difficult to prove to lenders exactly what your income really is.
Fortunately, in the summer of 2018, The Canadian Mortgage and Housing Corporation (CMHC) started taking steps to help make it easier for self-employed individuals to get a mortgage. One example of this is that business owners are now only required to provide lenders with one year’s worth of tax documents in order to prove their income.
Steps to getting a self-employed mortgage.
Despite the fact that CMHC has made it easier for business owners to get mortgages, the process is still more complex than it is for T4 employees. When you have a job, lenders feel relatively secure that you are financially stable enough to make your mortgage payments.
As an entrepreneur you will require a little more documentation in order to prove your income. If you are self-employed, you will typically need a stated income application, a signed income declaration, and proof that you are in fact self-employed.
Most lenders will require the following documents for Self Employed Mortgage in Canada:
Income tax returns – these do not necessarily have to show a large income, but if you are showing a loss, it will likely kill your chances of getting a mortgage.
Your Notice of Assessment.
Documents proving that your HST has been paid in full.
Your business license or articles of incorporation.
Your company’s financial statements.
Proof that you own the business.
Contracts which show that you will have income in the coming years.
A down payment of 10% or more.
Eligibility for self-employed mortgages
In order to get a self-employed mortgage, you will have to show that you have been self-employed for at least two years.
When assessing your eligibility for a self-employed mortgage, lenders will only look at your taxable income. This can be a problem for many entrepreneurs because they frequently have tax write-offs that lower their income on paper. If you are considering getting a self-employed mortgage within the next couple of years therefore, you might want to consider taking less write-offs. Yes, that means you will pay more income tax, but it could also help improve your chances of getting a mortgage.
Mortgage default insurance for self-employed mortgages
Another important factor to consider when getting a self-employed mortgage, is mortgage default insurance. If you are able to prove your income with your Notice of Assessment than your CMHC default insurance works the same way it would for a T4 employee. You must pay the premium if your down payment is less than 20%.
If you cannot prove your income using your Notice of Assessment, then you will be required to pay down 10% and you will need a mortgage lender that offers Canada Guaranty or Gen worth mortgage default insurance. These are the only two providers in Canada that offer insurance for state income files.
Mistakes to avoid while getting a self-employed mortgage
Since qualifying for a self-employed mortgage can be tricky as it is, it is worthwhile noting there are certain mistakes an entrepreneur can make that will damage their chances of being approved for a mortgage.
If you are considering applying for a self-employed mortgage within the next couple of years, take steps now to avoid these common mistakes:
Hidden income – as a business owner, it may be tempting to receive in-kind payments, but if you do be sure to report them to the CRA as income. If the income is not reported, it will lower your overall income on paper and make it more difficult to get a mortgage.
Inflating your income – you cannot get a self-employed mortgage simply by stating your income. You need to back up these claims with proof.
Hidden debts – Having too much debt is never a good thing when you are applying for a mortgage, but concealing debt can be much worse. If you are caught – and there is a very good chance that you will be – your mortgage is likely to be denied on that basis.
Avoiding debt – Just like having too much debt is a bad thing, not having any can be bad too. If you avoid loans and credit cards altogether, you won’t have a credit history for lenders to examine. This makes lenders nervous because you don’t have a history of paying off your debts.
Not saving a large enough down payment – since your income as an entrepreneur fluctuates more than that of a T4 employee, lenders will usually want to see a larger down payment for a self-employed mortgage. Usually, you will be required to put down 10% or more.
There are many lenders that specialize in self-employed mortgages however, navigating the process and finding the lenders that will be willing to give you the best rates and terms can be difficult. For this reason, it is recommended that you work with a qualified mortgage broker like Matrix Mortgage Global. We have access to dozens of lenders and we can help you get the self-employed mortgage that is right for you. Contact us today for more information.
Frequently asked questions about self-employed mortgages
Q: Can I get a pre-approval for a self-employed mortgage?
Ans: Yes! At Matrix Mortgage Global, we can process a pre-approval for a self-employed mortgage for you.
Q:How much of a loan can I qualify for with a self-employed mortgage?
Ans: If you are already a homeowner and have CMHC or Genworth insurance, you may be able to get a mortgage worth up to 90% of your current home. Without this insurance, you may be able to qualify for a mortgage worth up to 80%. If you are not currently a homeowner, the size of mortgage that you could qualify will depend on a number of factors such as income, credit score, etc.
Q: Can I still qualify for a self-employed mortgage if my income is low?
Ans: If your income is low on your Notice of Assessment but you can provide documentation that you actually earn more, you may still be able to qualify for a self-employed mortgage.
Q: What will the interest rate be on my self-employed mortgage?
Ans: Because lenders generally consider self-employed individuals to be a higher risk than T4 employees, self-employed mortgages typically have a higher interest rate than traditional mortgages. Nevertheless, there are things you can do to help you get a better rate. These include saving a larger down payment, getting mortgage default insurance, and maintaining a strong credit score.
Q: Can I get a second mortgage if I am self-employed?
Ans: Yes, at Matrix Mortgage Global, we can help self-employed individuals get first mortgages, second mortgages, refinancing and more.
Q: Can I still get a self-employed mortgage if I don’t have a good credit score?
Ans: Having a strong credit score will make it easier for you to get a self-employed mortgage but at Matrix Mortgage Global, we have access to a wide range of specialty lenders and we may still be able to help you, even if you have a poor credit score.