Traditionally, when you’re self-employed and applying for a mortgage, you’ll likely face more obstacles than someone who earns a regular salary through an employer.
If you can prove your income, show you’re up-to-date on your taxes and you have solid credit, however, your chances of being approved for a mortgage are greatly improved.
Self-employment numbers continue to grow steadily. Statistics Canada reported there were 2.8 million self-employed Canadians in 2017. Intuit Canada predicts freelancers, independent contractors and on-demand workers will make up 45% of the Canadian workforce by 2020.
If you’re self-employed, it’s in your best interest to minimize your reported income so you pay less tax. Unfortunately, this can work against you when it comes time to apply for a mortgage as income plays a key role. It’s helpful to give your accountant a head’s up if you’re in need of a mortgage in the coming years.
Specialized mortgage programs
There are special mortgage programs available if you’re self-employed and can’t prove your income in a traditional sense, but you’ve established a track record of responsibly managing credit and finances.
Under these programs – known as stated income – you may be able to borrow up to 90% loan to value – meaning the down payment can be as low as 10% of the purchase price, with at least 5% coming from your personal savings. The remaining 5% may be gifted by an immediate family member.
New changes to self-employed rules
In October 2018, Canada Mortgage Housing Corporation (CMHC) brought new rules into effect that made it a little easier for the self-employed to qualify for a mortgage.
This included being more lenient on business owners who had been in operation or were in the same line of work for less than two years – such as acquiring an established business, sufficient cash reserves, predictable earnings, and previous training and education.
CMHC also now allows for a broader range of documentation options to increase flexibility for satisfying income and employment requirements when qualifying self-employed borrowers, such as a Notice of Assessment (NOA) accompanied by a T1 General, the CRA Proof of Income Statement and the Statement of Business or Professional Activities (T2125) to support an “add back” approach for grossing up income for sole proprietorship and partnerships.
This added flexibility for proving income and employment, and helping those who have been self-employed for a shorter period of time helps streamline the mortgage process for business owners.
Do you have questions about your options as a self-employed borrower or your mortgage in general? I’m here to help! Answers are a call or email away.