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How to get a mortgage when you're self-employed
In British Columbia, 18.4 per cent of the workforce is now self-employed and many work out of their homes, according to Statistics Canada. If you’re self-employed and thinking of buying a home, you’ll need to know about new mortgage rules.
To increase your chances of qualifying, you'll need to be familiar with what lenders require and what questions they'll ask.
What do lenders consider a self-employed borrower?
Mortgage lenders at banks and credit unions consider a borrower to be self-employed if you:
- run a business alone as a sole proprietor, with a partner, or as a corporation;
- receive 25 per cent or more of your income from the business;
- work on short contracts for different employers; or
- are paid solely on a commission basis.
You're not self-employed if you receive a regular paycheque from an employer, even if it’s part-time work performed for more than one employer. Under these circumstances you're considered a salaried employee.
How will lenders evaluate self-employed borrowers?
Lenders evaluate salaried and self-employed borrowers the same way: on the size of their down payment and on their ability to repay the mortgage. But there is a difference. Salaried borrowers must verify gross income through paycheques or a letter from an employer. Self-employed borrowers must verify net income, or what’s left after business deductions are subtracted from gross earnings.
For example, if a self-employed person makes $120,000 annually in gross earnings but writes off $40,000 for business expenses, they have net earnings of $80,000. Unless they have documentation to convince lenders their net income is higher, they’ll be treated the same way as a salaried employee making $80,000 annually.
What should I provide a lender?
As proof you have a viable business, have a good credit rating, and make timely payments on loans and monthly bills, you'll need to provide the past two years of the following documents:
- monthly bank statement;
- corporate tax return;
- business balance sheet;
- profit-and-loss statement;
- business credit card statements; and
- credit references or letters from financial institutions.
New changes
The Canada Mortgage and Housing Corporation (CMHC) now allows a notice of assessment (NOA) accompanied by the 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.
Some lenders may also ask for proof that your business is growing and has prospects for future growth.
Lenders will average your earnings over a minimum of two years to get a big picture of your finances. This means that if your net income in 2020 was $120,000 and your net income in 2019 was $100,000, you may qualify for a loan based on an average income of $110,000.
If you're a self-employed borrower, you'll need to have a down payment of at least 10 per cent.
You'll also need to provide documents, including:
- a letter from your accountant;
- proof you pay rent on time; and
- a personal balance sheet showing assets such as stocks, and debts such as credit cards or car loans.
You should make photocopied sets of all documents, prepare them as a package, and have them available to email to lenders or mortgage brokers.
Since you'll likely shop for a mortgage at different financial institutions or use a mortgage broker, you’ll want to present yourself as an organized and responsible borrower.
As a self-employed business owner, getting a mortgage with a good interest rate depends on your ability to maintain payments and your the quality of your preparation.