Mortgage Guide for Self-employed, is for you if you are a business owner, a contractor, or an entrepreneur who is trying to get approved for a mortgage.
There is no better time to be self-employed! With the explosion of the internet of things and the rise of the Gig Economy, whether you want to open up a small business or have a big idea that can change the world, it’s now easier than ever to be your boss. There are many perks of being self-employed: the flexibility, the earning potential, the tax benefit, etc. Getting approved for a mortgage is not one of them and that is why we have produced our Mortgage Guide for Self-employed . Here’s why:
- Unlike a salaried employees, the earning of a business can fluctuate. Therefore, it is difficult for a lender to assess your income level.
- Many business owners choose not to take money out of the company. This means your income will look a lot less than what your really make.
As a result, it is often hard for self-employed borrowers to qualify for mortgages that meet their needs. That’s why we are here to help! Let’s look at how Banks qualify self-employed mortgages.
How does a lender determine income for self-employed?
- Standard Income: This is the personal income you report. The lender will first look at the income reported on your T1 (Line 150) and Proof of Income Statement (POI), which you can obtain from your CRA Portal. If the income your reported is deemed enough to cover your mortgage payment, you are good to go!
- Stated Income: This is the actual usable income. If your personal income on your tax return is not enough to cover your mortgage payment, the lender will also look at the overall profitability of your business to determine the actual “usable income”. The lender usually looks at your business tax returns from the past two years, GST/HST returns, and bank statements. Some lenders allow you to use up to 3X of the income reported on your personal tax return as “stated income” to qualify for the mortgage. However, each lender’s requirement and risk tolerance may be a little different.
How much income is “enough” to pay my mortgage?
- Lenders use Debt Servicing Ratios to assess whether your income is “enough” to cover your mortgage payment
- Gross Debt Servicing (GDS) and Total Debt Servicing Ratio (TDS) and are the two commonly used metrics by the lenders.
- GDS is your monthly mortgage payment, property tax, and heat, divided by your monthly income
- TDS is your monthly mortgage payment, property tax, heat, and other debt payments (credit cards, car loans, etc.), divided by your monthly income
- The general rule used by lenders to determine eligibility is to ensure GDS<35% and TDS<42%.
- Sometimes a lender may be willing to go up to 49% TDS. The upper limit of the ratio varies depending on the lender and the overall strength of your application. You want to use an experienced mortgage professional who understands the merits of each lender’s self-employed mortgage program and can help you present a strong business case.
How much down payment do I need?
It depends on the type of income you use to qualify for your mortgage and the property value. We summarized the minimum down payment required under each scenario below:
|Income Used||Property Value||Minimum Down Payment Needed|
|Standard Income (per personal tax return)||< $1 Million||5%|
|Standard Income (per personal tax return)||> $1 Million||20%|
|Stated Income (actual earning based on business tax return)||Any Value||35%|
What else does the lender look at?
Many lenders require a “business case” for self-employed mortgage applications. Some also call it “lender notes”. These are rationales submitted by your mortgage advisor to argue why your mortgage should be approved. Here are some elements usually included in a business case for a self-employed mortgage:
- Detailed of the business operation, such as industry, time since incorporation, location, and client base
- The gross business revenue and cost structure supported by financial statements
- The amount of liquid assets, such as stocks, GICs, and other investments the borrower or the business holds
What documents do I need to provide?
Here are some of the common documents required by lenders. The documentation requirements differ from lender to lender and are subject to change.
- T1 Income Tax Return for the most recent 2 years
- Corresponding Notice of Assessment (NOA)
- Business Tax Return for the most recent 2 years
- Financial Statements for the most recent 2 years
- Article of Incorporation
- Business License (if applicable)
- GST or HST returns (if applicable)
- Business Credit Report (if applicable)
Now you probably get the picture – these criteria sated above are some but not all the reasons why it’s not easy for a self-employed borrower to qualify for a mortgage with the big banks. Further more, many lenders change their lending criteria based on government policy changes and their changing risk tolerance.
Another option is to consult an alternative or private mortgage lenders, who can usually offer to lend you a higher mortgage amount as they are not restrained by income verification rules. These mortgage have higher interest rates than the banks, but more and more of them are moving to relatively competitive rates.
Hopefully you enjoyed our Mortgage Guide for Self-employed. Now you know it’s simple to qualify for a mortgage when you are self-employed. Here’s how we can help!
As mortgage qualification gets tougher, self-employed buyers turn to private lenders. Speak to one of our experienced advisors today. We take the time to thoroughly understand your situation and your business. Let us help you present a strong business case to multiple lenders to get you the best mortgage! Click here to read our Refinance Guide.