SaveSavedRemoved 0

(October 30, 2024)

If you’re self-employed and dreaming of homeownership, the mortgage process can feel like a maze. Unlike traditional applicants—who typically have straightforward income sources and only need 7-10 days of employment tenure—self-employed individuals face unique challenges. One key requirement is demonstrating at least two years of self-employment, which helps prove your financial stability. And then there’s the paperwork! As a self-employed person, you don’t generate typical pay stubs, and requesting an employment letter isn’t as simple as it is for salaried workers, since you’re both the employer and the employee. But don’t worry; it’s not as daunting as it seems. You’ll need to provide different types of income documents that might feel unfamiliar, but chances are, you already have them tucked away in your filing cabinet—or your accountant does. So, if you’re self-employed and looking for a mortgage, remember to focus on two main things: maintaining a two-year self-employment history and gathering that essential collection of income documentation.

TWO YEAR TENURE

The qualification criteria for mortgages are referred to as “guidelines” and are generally flexible and negotiable, rather than strict and unyielding. Lenders frequently make exceptions to these guidelines, and self-employed applications are no different. For instance, if you’re transitioning from employee to self-employed status within the same profession, lenders may apply common sense and make exceptions to the standard requirements. This is particularly common for professionals such as engineers and tradespeople.

For example, if you worked as a salaried welder for ABC Corp with regular source deductions and benefits (CPP, EI), your accountant might suggest that contracting yourself out to your current employer could yield higher (take-home) income. This kind of transition is typical in many professions, and the standard two-year tenure requirement is often reduced to one year or, in some cases, as little as six months. The same flexibility often applies to a professional engineer who may have shifted from corporate employment to self-employment as a contractor.

On the other hand, if you’ve moved to self-employment in a field where you have no prior experience, lenders are unlikely to relax the two-year tenure requirement.

IINCOME DOCUMENTATION

This is where things get a bit more complex. Providing the documents that a lender requests is one thing, but understanding how the lender analyzes and interprets that documentation is an entirely different challenge. A lender’s rationale may not always make sense and can either pleasantly surprise or deeply disappoint you. Below are some key document requests to be aware of, along with the reasons why they’re required:

(i) T1 Generals (in their entirety):

The T1 General is a critical document for self-employed income qualification as it clearly shows how you declare your income. If you’re self-employed, you have multiple options for declaring income depending on your financial goals. You may issue yourself a T4 and contribute to CPP and EI, or you could choose to withdraw income as dividends, avoiding CPP and EI contributions. You might even combine both methods! Your chosen approach to self-employed income will be visible to the lender in the T1 General. The most essential information is in the first six pages, but be prepared to provide the entire T1 General, as additional schedules referenced in these initial pages are included in later sections of the document.

Minimum Down Payment when qualifying with T1 Generals: 5% - 10%

(ii) Notice of Assessments (NOAs):

Lenders typically request two years of NOAs for two main reasons: to verify the income reported in the T1 General and to confirm there are no taxes in arrears. This is particularly important because, unlike employees whose taxes are automatically deducted by their employer, self-employed individuals are responsible for managing their own tax payments. Lenders recognize that employees rarely owe back taxes due to mandatory employer deductions, whereas it’s more common for self-employed individuals to have outstanding tax balances.

Why is this significant to lenders? If you have tax arrears, the Canada Customs and Revenue Agency (CCRA) could place a lien on your property, which disrupts the lender’s risk position. In this case, the CCRA’s claim on the property would take priority, relegating the lender’s claim to a secondary position. If foreclosure becomes necessary, there may not be enough proceeds to fully cover the mortgage balance after satisfying the CCRA’s claim. For this reason, lenders are strict about ensuring that self-employed applicants have no outstanding taxes when qualifying for a mortgage. Minimum Down Payment when qualifying with NOAs: 5% – 10%

(iii) Business Financials Statements:

If you are incorporated (or operate as a limited partnership), a lender may request your business financial statements. Typically, they will try to qualify you based on your most recent two years of declared income, which can be easily found in Line 150 (or 1500) of your Notice of Assessments. But if you’ve been retaining a substantial amount of income within the business instead of withdrawing it, this retained income won’t count as personal income for mortgage qualification purposes. While this may be a healthy financial strategy personally, it can create a gap in income verification from the lender’s perspective.

In this case, if the income declared in your T1 General and Notice of Assessment isn’t sufficient to qualify for your mortgage, the lender will need to review your Business Financial Statements to account for the retained surplus. This is often where the complexity of self-employed mortgage qualification peaks. Business accounting strategies are often broad and sophisticated, and at times, too complex for lenders to readily interpret the surplus income. If this happens, be prepared to provide a more detailed explanation of your business finances.

At this stage, self-employed applicants may also realize that their tax strategies may limit their ability to qualify under standard lender income parameters. The remaining option may then be to seek alternative lenders who specialize in self-employed mortgages with simpler qualification guidelines. These lenders typically bypass the business financial analysis altogether, instead focusing on business bank statements. It’s important to note that these products often come with higher interest rates, and lender/broker fees generally start at 1%. Minimum Down Payment when qualifying with Business Financial Statements: 10% – 20%

(iv) 12-months Business Bank Statements:

Twelve months of bank statements are often requested by alternative lenders specializing in self-employed mortgages. Instead of reviewing income tax documents and business financial statements, these lenders rely on a year’s worth of business bank statements to estimate annual income based on deposits and withdrawals. The key difference between this method and traditional financial analysis is that it involves a higher degree of self-declared income and expenses, making it largely unverified. This approach, however, can be beneficial for both the applicant, who may have difficulty with traditional lenders, and the alternative lender, who uses more flexible qualification guidelines.

In return for these relaxed guidelines, the applicant agrees to a higher interest rate. To balance this, alternative lenders often offer extended amortizations of up to 35 years and short terms of one to three years, giving applicants the opportunity to refinance with a traditional lender sooner. Minimum Down Payment when qualifying with 12-months Business Bank Statements: 20% – 35%

SUMMARY

The mortgage process as a self-employed individual may present unique challenges, however, it’s entirely achievable with the right preparation and understanding. By focusing on maintaining a solid two-year self-employment history and gathering the necessary income documentation, you can improve your chances of securing a mortgage. But also remember that lenders are often willing to be flexible with their guidelines, particularly for those transitioning within their profession. Whether you choose to pursue traditional lending options or explore alternative lenders, being informed about the various qualification pathways will help set the expectation when you embark upon the mortgage qualification.

Are you self employed and in need of a mortgage? Call or text Marko Gelo right now at 604-800-9593, or Click Here to schedule a free, no-obligation phone call with Marko. You can also call Marko on WhatsApp.

Download my amazing Mortgage App…it’s loaded with calculators and tonnes of useful information!

Don’t want to miss out on the next blog post? Click Here to have future issues emailed directly to your inbox!