Being self-employed comes with some unique issues that make it more challenging to get a mortgage. The roughly 15% of Canadians who are self-employed may have to jump through a few extra hoops to get approved for a home loan. However, it’s not impossible. Let’s look at the options available to self-employed individuals who want to apply for a mortgage.
Key Points
- Self-employed mortgages are designed specifically for the nearly 15% of Canadians who are self-employed and who may have difficulty getting approved with non-salaried income.
- Loan qualifications are more stringent and involved for self-employed mortgages, and typically require proof of steady income for at least 2 or 3 years.
- Self-employed mortgages are offered by all sorts of lenders, including conventional and alternative lenders.
What Are Self-Employed Mortgages?
A self-employed mortgage is designed specifically for borrowers who earn income from self-employment and not from traditional salaried employment. Self-employed individuals often experience fluctuating income, making it difficult to prove consistent earnings that conventional lenders generally like to see. Given this inconsistency in income, self-employed earners may require more specialized mortgage products.
While salaried employees supply their lenders with a letter of employment and pay stubs, self-employed applicants will need to provide their lenders with T4 slips and Notices of Assessments (NOAs) from the last two years to prove their income.
It should be noted that self-employed individuals may still qualify for a traditional mortgage. It just depends on how the lender qualifies you. Additionally, if you’re applying for a mortgage with a partner who has a salaried job, you’d likely be eligible for a traditional mortgage.
Are You Self-Employed?
A self-employed individual is someone who does not work for an employer but rather works for themselves. These self-earners earn an income from clients and vendors, instead of a fixed salary from an employer. The worker is independent and is solely responsible for determining when to work and for whom to work.
Keep in mind that someone with a long-term contract may not be considered self-employed, even if they work for the company strictly as a contractor.
Types Of Self-Employed Income
- Traditional income. This type of income refers to regular employment earnings that are shown on your T4s or Notices of Assessment (NOAs), if you have any. In this situation, your lender may take the average of the past 2 years to get a picture of your annual income.
- Non-traditional income. This income type is verified through your business’s bank and financial statements.
- Stated income. This type of income cannot be verified through traditional means. Many A lenders may not work with this form of income, though B lenders and private lenders often do. With stated income, you would sign an agreement declaring your corporate income.
Where Can You Get A Self-Employed Mortgage?
Self-employed mortgages are available from the following sources:
‘A’ Lenders
Also referred to as ‘prime’ lenders, A lenders are traditional financial institutions, like banks. These lenders provide self-employed mortgages, however, their criteria are typically more stringent than employed individuals applying for a mortgage.
When applying for a self-employed mortgage with a prime lender, be prepared to supply several documents to prove your financial health, such as 2 or 3 years’ worth of NOAs, business financial statements, and other paperwork as requested.
‘B’ Lenders
These lenders, also known as ‘subprime’ lenders, are a popular option for self-employed borrowers who may not have an easily verifiable income.
Certain B lenders such as private mortgage lenders and some credit unions are not federally regulated, so their loan criteria are not as strict, and a mortgage stress test is not required. However, B lenders tend to charge higher interest rates for the added risk they assume, you may encounter higher interest rates and fees as a result.
Requirements For A Self-Employed Mortgage
Getting approved for a mortgage as a self-employed individual is more complicated than it is for an employed applicant. To secure a mortgage when you work for yourself, you’ll need to meet the following criteria.
Income
Income is a factor in a mortgage application regardless if you’re self-employed or a salaried employee. That said, you may need to provide more proof that your income is strong and reliable when you’re self-employed.
Generally speaking, you’ll need to prove at least 2 years of income. Your lender will verify your income by your tax receipts, NOAs, business financial statements, and business deposit history.
Your ability to qualify for a mortgage as a self-employed person will depend on how long your business has been in operation and the status of your business (ie. sole proprietorship or incorporation).
Credit Score
Healthy credit is a typical requirement among mortgage lenders. But it may be even more important when you’re applying for a mortgage as a self-employed individual.
A credit score above 660 is considered ‘good’, so you should ensure that your score is at least 660 when applying for a mortgage to increase your chances of approval.
Down Payment
In Canada, the minimum down payment amount required is 5% of the purchase price of the home. That said, you may need to put down more depending on your credentials.
For instance, self-employed individuals who can prove a healthy income over a few years may be able to buy a home with as little as 5% down. But those who cannot show enough income on their tax returns may need more, at least 10% or higher.
Debt Service Ratios
A debt service ratio is a measurement of how much of your income is dedicated to paying your current debt. Lenders will only lend you money if you fall within their guidelines.
Debt service ratios can be broken down into Gross Debt Service (GDS) and Total Debt Service (TDS). Your GDS ratio is the percentage of your gross income that would be used to cover all housing costs, and should not be higher than 39%. Your TDS ratio is the percentage of your gross income that would be used to cover all housing costs, plus all other debts, and should not exceed 44%.
What Documents Do Self-Employed Individuals Need To Get a Mortgage?
It is important for self-employed individuals to compile all the necessary documents in order to strengthen their mortgage application. Oftentimes, if a self-employed individual can provide evidence of income, they can be eligible for regular mortgage rates and products.
Here are some other documents necessary for a self-employed individual to obtain a mortgage:
- Evidence that your HST and/or GST is paid in full
- Notices of Assessment
- Contracts showing expected revenue and past revenue for the last few years
- Personal and business credit scores
- Proof of principal ownership in the business
- Business license
- Proof that your down payment has not been gifted
Are Self-Employed Mortgages Insured?
Mortgage Default Insurance (CMHC insurance) works the same for self-employed individuals as for everyone else. If you are only putting down between 5% and 19.99%, you’ll pay a premium. However, in some cases, you may still have to pay for it if your down payment is lower than 35%. This may happen if you can’t fully document your income.
CMHC
Self-employed borrowers with documentation to prove their income can access CMHC insurance with the same criteria and premiums as salaried and employed borrowers.
- Maximum loan-to-value (LTV) ratio of 95%
- Minimum 2 years of business operations required
- Maximum 30-year amortization period for some buyers (Effective December 15, 2024, 30-year amortizations will be available to first-time homebuyers or those who are buying a newly constructed home)
- Maximum property value of $1 million (Effective December 15, 2024, the home price cap for insured mortgages will increase to $1.5 million)
Sagen
Sagen provides self-employed borrowers who manage their finances and credit responsibly but do not have traditional income with mortgage default insurance.
- Maximum loan-to-value ratio of 90%
- A proven 2-year history of responsible credit and financial management required
- Annual income and annual business income must be declared
Canada Guaranty
Canada Guaranty‘s Low Doc Advantage program provides mortgage default insurance to self-employed borrowers with a strong credit profile and limited documentation.
- Maximum 30-year amortization period for some buyers (Effective December 15, 2024, 30-year amortizations will be available to first-time homebuyers or those who are buying a newly constructed home)
- Strong credit score is required
- Maximum loan-to-value ratio of 90%
- Maximum property value of $1 million (Effective December 15, 2024, the home price cap for insured mortgages will increase to $1.5 million)
Mortgage premiums are added to mortgage payments and paid off during the amortization period.
How To Increase Your Chances Of Getting A Mortgage As A Self-Employed Individual
There are steps you can take to make yourself more attractive to a mortgage lender. Let’s take a look at some of these factors in more detail.
Boost Your Credit Score
Whether you’re self-employed or not, your credit score plays an important role in your approval. Paying bills on time, making more than your minimum credit card bill payments, and not spending close to your credit card limit are all ways to increase your credit score. If your credit score is high, you will be more attractive to a lender and might even qualify for lower interest rates.
Make A Large Down Payment
If you put a bigger down payment on your home, the bank will likely see you as less risky. Moreover, a bigger down payment means a lower loan amount, resulting in more affordable monthly payments.
Pay Down Your Debt
The less debt you have, the easier it will be to make your mortgage payments. It will also lower your debt-to-income (DTI) ratio, which lenders look at to determine your ability to afford mortgage payments. It’s a good idea to settle as much debt as you can to free up more money to pay your mortgage.
Keep A Detailed History Of Your Self-Employment
Keeping accurate records of your self-employment will establish a strong track record. Banks are more likely to lend to you if you can prove that you have been successful in your self-employment. Try to have at least two years of self-employment history before applying for a mortgage.
Maintain Accurate Records
Make sure to keep your tax and business records accurate and up-to-date. Disorganized records might make a lender less likely to trust your ability to carry a mortgage. To encourage more trust from a lender, ensure your records are in order before applying for a mortgage.
Should You Get A Mortgage As A Self-Employed Individual?
If you’re still on the fence about applying for a mortgage as a self-employed individual, let’s take a look at some of the pros and cons.
| Pros | Cons |
| Availability: More than ever, many available lenders are willing to offer you a mortgage if you have the right documentation | Might higher fees and interest rates: Lenders, especially private lenders, are almost always likely to have higher fees and interest rates on mortgages for self-employed individuals. |
| Good Investment: Paying off a mortgage isn’t easy, but the value of a house as an investment could appreciate over time. | Might need to hire an accountant: Self-employed individuals need a lot of documentation for income and taxes that can be complicated to compile. Consider hiring an accountant to ensure your documentation is ready for a mortgage application. |
| Defaulting if your income is unstable: Self-employed individuals sometimes have unpredictable income. If business is good for a year and then takes a dive the next year, a self-employed individual might be forced to default on their mortgage. |
Final Thoughts
Applying for a mortgage as a self-employed individual poses more challenges than someone with a stable employee salary. However, with all the options available to you as a self-employed individual, it’s worth considering making it work, as the rewards may outweigh the risks. After all, owning a house can provide you with a valuable asset that appreciates over time, helping you build wealth while providing you with a place to call home.
Self-Employed Mortgage FAQs
How do lenders verify self-employed income for a mortgage?
How much can I finance as a self-employed individual?
Can I get a mortgage if I’ve only been in business for a few months?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
