Self-Employed
Getting a mortgage in Canada while being self-employed can be more challenging compared to salaried employees, but it’s certainly possible with the right preparation.
Working with a mortgage broker can be advantageous, especially if you're self-employed. Brokers have access to multiple lenders, including those that specialize in mortgages for self-employed individuals. They can help you find the best rate and terms, and they often know which lenders are more flexible with documentation requirements.
Here's what you need to know:
Income Verification and Documentation
Self-employed individuals need to provide more documentation to prove their income stability. Here’s what lenders typically ask for:
Two Years of Tax Returns (T1 General): Most lenders require at least two years of personal tax returns that show a consistent income. You’ll also need the Notice of Assessment (NOA) from the Canada Revenue Agency (CRA) to confirm that you don’t owe back taxes.
Business Financial Statements: For incorporated business owners, you may need to provide business financials to show the health of your company. This could include income statements and balance sheets.
Proof of Consistent Income: Lenders prefer to see stable and predictable income. Large fluctuations may raise red flags. If income varies widely, lenders may average your income over the past two or three years to assess your eligibility.
Invoices, Contracts, or Client Agreements: Proof of ongoing contracts, invoices, or long-term client relationships can also demonstrate the stability of your business and future income potential.
Down Payment Requirements
For self-employed individuals, some lenders may require a larger down payment than usual to offset the perceived risk. While the minimum down payment in Canada is typically 5% for homes under $500,000, lenders may ask for 10-20% from self-employed applicants, especially if income verification is difficult.
If you’re putting down less than 20%, mortgage default insurance (CMHC or a private insurer) is required, which could involve stricter qualification standards.
Good Credit Score
A strong credit score is critical for self-employed mortgage applicants. Lenders will scrutinize your credit history more closely, so it’s important to maintain a good score by:
- Paying off debts on time (credit cards, loans).
- Keeping your credit utilization low (ideally below 30% of your available credit).
- Avoiding excessive new credit applications, which can lower your score.
Most lenders prefer a credit score of 680 or higher, but some may offer mortgages to applicants with lower scores.
Lender Options
Traditional Lenders (Banks): Large banks often have stricter requirements for self-employed individuals, so it may be harder to qualify with them unless you have several years of consistent income and a good financial track record.
Alternative Lenders: Some alternative lenders (credit unions, mortgage brokers, or private lenders) may have more flexible criteria.
CMHC Mortgage Loan Insurance for the Self-Employed
The Canada Mortgage and Housing Corporation (CMHC) provides mortgage insurance to self-employed individuals who can prove their income with proper documentation. However, if full documentation isn’t available, CMHC may still insure the loan as long as a larger down payment (usually 10%) is made and the borrower can demonstrate business sustainability.
Improving Your Financial Profile
Reduce Debts: Lowering your debt levels before applying for a mortgage can improve your debt-to-income ratio and overall financial profile.
Increase Savings: Building up your savings not only helps with the down payment but also shows lenders you’re financially responsible.
Keep Consistent Records: Maintaining organized financial records for your business and personal income will make it easier to provide documentation when applying.
Final Tips
- Plan Ahead: If you’re planning to buy a home in the near future, it’s essential to start organizing your financial records and maximizing your income claims on your tax returns.
- Consult a Financial Advisor: Getting professional advice can help you understand your financial standing, improve your credit score, and create a strategy for obtaining a mortgage.
By preparing well, keeping your documents in order, and understanding your lender’s requirements, it’s entirely possible to secure a mortgage while being self-employed.
