Self-Employed Mortgage in Canada: What Are the Requirements and Qualifications?

A report from Statistics Canada indicated that over 2.6 million Canadians are self-employed. This implies that around 15% of workers in Canada are their own bosses. Being self-employed has its pros, but one challenge self-employed people might encounter is qualifying for a mortgage.

Purchasing a house as a self-employed person could be very tricky. This article will answer any questions you have about buying a house as a self-employed person and highlight the whole process in Canada.

What is a Self-Employed Mortgage in Canada?

Self-employed mortgages in Canada are designed for individuals who don’t earn a regular salary or get paid by a company they own most of. The primary distinction is that self-employed people often have varied incomes, unlike those who receive a steady paycheck regularly.

In a regular mortgage application, the lender examines your income from your pay stubs and checks your last two years of T4s (Statement of Remuneration) and Notice of Assessments (NOAs) to confirm. However, a self-employed mortgage can be either subprime or prime. This depends on how your income is verified and might fit into different lending criteria.

Usually, self-employed people fit into one of four categories when they apply for a mortgage:

A sole proprietor who can show 2 years of verified (taxed) income
A sole proprietor lacking verifiable income
An incorporated individual with 2 years of certified (taxed) income
Incorporated lacking qualified income

How to Qualify For a Mortgage as a Self-Employed?

Qualifying for a mortgage as a self-employed depends on the length of time you’ve been doing it and if you’re part of a company.

A sole proprietor who can show 2 years of verified (taxed) income– You must show at least 2 years of income from your NOA and T4s.

A sole proprietor lacking verifiable income– requires a minimum of 6 months of business deposit records.
An incorporated individual with 2 years of certified (taxed) income – needs a minimum of 2 years of T4s and financial statements from the business.
Incorporated lacking qualified income – needs at least 6 months of documented deposits or stated income.

What Percentage of The Appraised Value Can I Borrow as a Self-Employed?

The amount of taxed income you can prove determines if you qualify for lower rates from regular lenders or higher rates from B or private mortgage lenders. If you can prove your income with T4s and Notice of Assessment (NOA), you can qualify for traditional mortgages with mortgage insurance.

If your downpayment falls between 5% and 19.99%, you’ll need to buy mortgage default insurance. But if you have a 20% downpayment, you won’t need it. However, this might change if you can’t prove your income.

Default Insurance Rates for Self-Employed Mortgage

Mortgage Default Insurance Rates With Proof of Income

Private insurers like Guaranty and Canada Guaranty offer self-employed mortgage insurance for borrowers with good credit, even if they have proof of non-traditional and limited income. You’ll need at least a 10% downpayment and choose a lender with a business-for-self (BFS) mortgage program from one of these insurers.

To cover the risk of borrowers defaulting, insurance companies charge a higher premium, especially for self-employed borrowers who might pose extra risks like industry or business cycle changes. Lenders might also add a premium to the mortgage rate for more risk and due diligence.

CMHC Self-Employed Mortgage Insurance

OSFI requires borrowers looking for prime lending with a down payment below 20% in Canada to purchase default mortgage insurance. CMHC applies identical insurance premiums, mortgage premiums, and qualification criteria to self-employed borrowers who can verify their income as it does to regular mortgage borrowers.

These are the essential prerequisites for CMHC:

The allowable maximum Gross Debt Service Ratio (GDS) is 39%, while the maximum Total Debt Service Ratio (TDS) permitted is 44%
You may achieve a maximum loan-to-value (LTV) ratio of 95%, enabling a down payment as low as 5% for the initial $500,000 of the home’s assessed value and 10% for any amount beyond that.
At least one borrower must possess a credit score of 600 or higher
The purchase price or lending value cannot surpass $1,000,000
The maximum amortization period is set at 25 years

A significant distinction between CMHC and private mortgage insurance lies in the necessity for income verification. This is a requirement for CMHC, particularly for self-employed individuals.

CMHC requires the following to verify the duration of the business’s operation:

Review Engagement Report and Financial statements signed by an accountant (if incorporated)
Income tax returns (NOA)
Audited financial statements (if incorporated)
GST returns

Business credit reports (if incorporated)

Active business account statements (if incorporated)
Business license and/or articles of incorporation

For income verification, CMHC additionally requires the following:

Proof of Income (POI)
NOA, accompanied by T1 General
Statement of Business (T2125)

Moreover, if you’ve been running your own business for less than 2 years or working in the same field for less than 2 years, CMHC might ask for extra documents to decide if you qualify:

Signed contracts

Evidence of owning an established business
Enough cash reserves
Previous education and training
Predictable earnings
Demonstrated history of managing credit

Recent account statements

Documentation of previous employment depending on the type of income

Business documentation

Different Methods for Verifying Self-Employed Income

There are three primary verification categories depending on the declared income:

Stated income

Traditional Income – Income subjected to taxation and averaged across two years.
Non-traditional income – Confirmed via dividends distributed or deposit records, which may include gross-ups derived from corporate tax filings.

Stated Income

This is also known as “no income verification mortgages.” Private lenders and B Lenders typically use this method for verification. Some A Lenders allow it with the Sagen Alt-A Program, but it’s rigorous. It might only be for individuals with an excellent credit history and a well-established business.

To determine whether the borrower’s income is reasonable, Canada Guaranty’s business-for-self (BFS) program, the Low Doc Advantage, needs to see the income reported on line 15000 of the NOA from the latest tax year. They also require details about the business’s gross revenue, type of business, and ownership structure.

Traditional Income

Traditional income verification usually involves confirming regular employment income, often by averaging the amounts reported on Notice of Assessments (NOAs) and line 15000 of T4s over 2 years. Additionally, for those receiving dividends from a Canadian corporation, a 2-year average from line 12000 may also be considered, alongside the average from line 15000 on their NOA. However, this method might not accurately reflect the actual income of many self-employed business owners.

Non-Traditional Income

In this scenario, a person’s NOAs and T4s may not accurately represent their actual income. Instead, their business’s bank and financial statements can be utilized to verify or adjust their income upward. Most self-employed individuals usually belong to this category.

Documentation Required for a Self-Employed Mortgage

You’ll need your Income Tax Statements (T1) and Notices of Assessment (NOA) for a self-employed mortgage. These are the primary documents required to qualify for a mortgage if you’re self-employed and unable to provide T4s.

Depending on the lender’s requirements, you may also need to furnish the following documents:

Evidence of updated income taxes

Business and personal credit scores
Your business’s financial statements

Copy of HST/GST number, Business Number Registration, or Articles of Incorporation

Proof showing full payment of GST and/or HST
Contracts displaying past and projected revenue for the upcoming years

Proof of primary and majority ownership in the business

Evidence that your downpayment was not gifted

You can use dividend income for a mortgage or traditional investment (such as LIF, RRIF, etc.) if you prove a stable income over two years and ensure continuous income throughout the mortgage term.

Here are four essential requirements that lenders usually ask for:

Income Tax Statement (T1) and Notices of Assessment

After 2-3 Years

Lenders might ask for 2-3 years of T1 or NOAs to confirm your income, including self-employed earnings reported as business income. They also use NOAs to check for any outstanding taxes. Unpaid taxes can concern lenders, and the CRA may place a lien on your home or seize assets if you cannot settle them.

HST/GST Account Number, Business Number, or Articles of Incorporation

These documents offer the lender insights into your self-employment tenure or business operation duration. Articles of incorporation apply solely to corporations. If your gross sales or revenue exceed $30,000 in a quarter of a calendar year or the previous four fiscal quarters, you’re required to register for an HST/GST number.

Financial Statements

Financial statements are another method of verifying business income. This becomes particularly valuable during non-traditional income verification when you want the lender to evaluate your business and personal income.

Bank Statements

Bank statements from your T2 (Corporate income tax return) and business account can provide supplementary evidence to support your business income assertions. Additionally, future income from signed contracts can be included, regardless of whether they have been fulfilled yet.

Mortgage Lenders For Self-Employed

Self-employed mortgages are provided by all three categories of mortgage lenders in Canada.

Prime or A Lenders

A lenders encompass Canada’s major banks and usually impose the most stringent lending standards. They mandate prospective borrowers to undergo a mortgage stress test to ensure they possess stable and adequate income to manage debts in case of interest rate hikes. Certain A Lenders offer mortgage products designed specifically for self-employed individuals.

Subprime or B Lenders

Subprime, also referred to as B lenders, are an alternative choice for individuals who fail to meet the mortgage qualification standards of an A lender. Since these lenders don’t provide default-insured lending, they exhibit more flexibility in their criteria. Consequently, interest rates with B lenders tend to be higher to account for the heightened risks involved.

Certain lenders provide A and B lending solutions through distinct channels within their mortgage operations. Some major banks may extend B lending options through their A lending or private/wealth banking channels. Prices and guidelines are typically determined based on the client’s relationship with the bank.

B lending often becomes the preferred solution for self-employed individuals who can afford a 20% down payment for their home purchase. This is because B lenders provide exceptions on debt-to-income ratios, especially for those registered as a corporation, where personal income may be lacking.

Private Lenders

Private lenders, whether individuals, corporations, or groups, are entities that offer private loans. They establish their own terms and conditions for both the approval process and the mortgage itself. Since they are not regulated, private mortgage lenders can set their own terms and rates.

Private mortgages usually serve as a final option for borrowers who don’t meet the standard risk criteria of A and B lenders. Interest rates are notably higher compared to A and B lending options, and fees are generally higher than those of B lending. Mortgage regulators typically require private mortgages to have an exit strategy for the borrower, as they are usually recommended for temporary financing.

What is a Stated Income Mortgage?

In a stated income mortgage, the lender doesn’t verify your income through conventional means. Instead, they permit you (by signing a declaration) to state or declare your income within reasonable limits. This type of mortgage typically doesn’t require extensive documentation to prove your income.

Instead, the stated amount must be deemed reasonable compared to the average income in your industry or business. Examples of documents used to verify Stated Income may or may not include invoices, bank statements, etc.

Insured stated-income mortgages enable a down payment as low as 10% but necessitate mortgage default insurance. A solid credit score is a fundamental prerequisite, and if the credit score is less than optimal, it may need to be balanced out with higher income (lower debt-to-income ratios) or a larger down payment (lower loan-to-value ratios) to enhance the likelihood of approval.

Likewise, stated income mortgages aren’t insured by CMHC; instead, the only available option is one of the private mortgage default insurers, such as Canada Guaranty or Sagen.

Conclusion

Securing a mortgage as a self-employed individual is indeed possible. Just like with standard mortgages, enhancing your income, elevating your credit score, and providing a substantial down payment all strengthen your likelihood of mortgage qualification.

Contact Superb Mortgages’ licensed and knowledgeable mortgage experts to learn how to leverage your self-employed income to qualify for a mortgage.