There’s a common misconception that it’s very difficult to get a mortgage if you’re self-employed. This often stems from the false perception that self-employed individuals don't have a steady income.
Of course, this is far from the truth. You can be self-employed and still ensure that you receive a set amount of income annually. What's important isn't so much your employment status. What’s important is your ability to prove your financial stability to keep up with mortgage payments.
So, if you’re wondering how to get a mortgage when you are self-employed, know that you need to show you’re a trustworthy borrower.
To help you do just that, we’ve put together a few tips to help you apply for a mortgage when you are self-employed.
How Does a Mortgage for Self-Employed Individuals Work?
If you’re seeking ways to get approved for a mortgage, having a clear understanding how self-employed individuals quality is a good place to start.
A mortgage for self-employed individuals is a home loan for people with non-salaried gross income. It typically requires additional income verification. You would be considered a self-employed person if you work for yourself without getting a regular paycheque from a third-party employer.
The chief difference lies in the consistency of your earnings. While those with permanent employment enjoy a more consistent income, self-employed individuals tend to have volatile incomes. Such fluctuations make lenders require extra proof of income to substitute traditional income verification strategies.
Pros
While it might be challenging to collect all the necessary financial information to validate your income, there are many benefits to getting a mortgage if you’re self-employed:
- Opportunity for credit growth. A strong credit history from managing a mortgage responsibly can open the door to better loan terms or additional financial products in the future.
- Flexible income verification. You may qualify for a mortgage by providing a minimum of 2 years of personal Income Tax Returns accompanied by the most recent Notice of Assessment (NOA). Other financial institutions may also accept alternative documentation, such as business financial statements, RRSPs, HST or GST payment proof, invoices or contracts, or bank statements showing income deposits.
Cons
Before applying for a mortgage when self-employed, consider its potential drawbacks:
- Income verification documents. You have to gather income verification documents, which may be more challenging than working for a third party.
- Difficulties qualifying at banks. Not all banks provide mortgage services for self-employed individuals. While major Canadian banks offer mortgages for self-employed borrowers, qualifying can be more difficult due to stricter income verification requirements.
- Higher rates compared to conventional home loans. Many lenders will increase your mortgage starting rate to offset the higher risk they take when offering funds to self-employed individuals.
How to Get a Mortgage If You’re Self-Employed
The question remains: How does a mortgage work if you’re self-employed?
Learn What Lenders Need to Know About You
When you apply for a mortgage, lenders typically evaluate you using the “5 Cs of credit”: Capacity, Capital, Collateral, Credit, and Character. These factors help them assess how risky it is to lend you money. Any lending institution assumes some risk when offering a mortgage, since there’s always a chance they might not fully recover the loan. The higher the perceived risk, the higher the interest rates they’ll charge to compensate for the possibility of loss.
In general, lenders want to determine whether you’re a reliable borrower who can keep up with regular mortgage payments. To minimize their risk of lending to you, they will perform multiple assessments to ensure you can repay. As a borrower, you must demonstrate to lenders that your mortgage payments will be made on time. How do you prove this? One way is by showcasing your assets, such as savings, bonds, and investments. However, the most critical factors - and what lenders will focus on - are your income history, credit history, and income stability.
Mortgage lenders typically require at least two years of income proof through documents like tax returns and Notices of Assessment. This will help establish your trustworthiness as a borrower. Having some assets to rely on will also enhance your creditworthiness.
Unsure if you have everything in order? Speak to one of our mortgage specialists, who can help you check that you have all the proof needed.
Ensure You Have All the Right Documents
There are several pay stubs and documents you’ll need to apply for a mortgage. To make the process easier, we've put together a handy list of the paperwork[JD1] (pdf) you’ll need to close the deal.
- Income Tax Returns. Be prepared to provide a minimum of 2 years of personal Income Tax Returns (T1 General).
- Notices of Assessment. Whether you apply for a mortgage online or in person, you’ll need to include you most recent Notices of Assessment. These documents will help you qualify for a mortgage, just like someone employed by a company or institution.
- HST or GST payment proof. Just like with your taxes, it’s important to verify that you’re making regular HST and GST payments.
- Personal and business credit ratings or credit scores. Your credit scores - both personal and business - reflect your credit history. So, it’s critical to provide both your personal and business credit ratings or credit scores.
- GST[BA2] [BA3] [JD4] Registration Number or License, Business Number or Business License, and your Article of Incorporation. Your GST registration number or license, business number or business license, and your Article of Incorporation serve as proof that your business is officially established and legitimate. Providing copies of your business bank statements may also be used to confirm your business exists.
- Contracts of current clients. These can be helpful to prove that you will continue to receive a steady flow of income in the future.
Maintain or Improve Your Credit Score
If you’re looking to secure a mortgage, having a good credit rating or credit score is fundamental. Your credit score reflects your credit history. It shows how responsively you’ve managed loans and lines of credit in the past.
If you’ve missed payments on credit cards or loans, your credit score will be lower. On the other hand, if you’ve always been consistent with credit payments and have proven that you can make payments on time, you’ll have a high credit score and a good credit rating.
Remember, mortgage lenders are analyzing your trustworthiness as a borrower. A good credit score is one of the most reassuring signals that you’re reliable in repaying your loans. So, make sure you keep your credit score in good condition by always making timely debt payments. If you need help improving your credit score, we’re here to help.
Get Smart About Your Taxes
Self-employed individuals must be very particular about filing their taxes. This is equally important when you are considering either a fixed or variable mortgage application. All your tax returns need to be up-to-date. You should also have no tax arrears, which is particularly important since lending institutions will check on this when you apply for a mortgage.
Paying your taxes on time is crucial, but there’s another critical factor to consider if you’re planning to apply for a mortgage: your tax deductions. As a self-employed person, you might have claimed different business expenses to maximize your deductions and reduce your taxable income.
While this is a smart tax strategy, it could work against you when you’re in the market for a mortgage. Why? Claiming too many expenses and tax deductions makes your reported income appear lower, which could undermine your eligibility for a preferred mortgage.
To qualify for a mortgage in a higher income bracket, consider reducing these claims and tax deductions at least two years before a home loan application. If you haven't done this yet, it’s a good idea to speak to a financial advisor about how you can put your best ‘tax' foot forward when you apply for a home loan.
Get Your Mortgage from a Credit Union
If you are an Innovation member, you know that we're always here whenever you need us. You can speak to one of our mortgage specialists to find a perfect home loan among numerous mortgage options.
Plus, we offer low mortgage interest rates, so you can rest assured that you’ll always get a favorable deal with us. If you aren’t an Innovation member yet, then you should know that a great home loan is just the tip of the iceberg. You can also enjoy all the benefits of a No-Fee Bank Account, earn cash dividends every quarter for banking with us, and even help us give back to your community.
Mortgage Default Insurance Rates
Mortgages for self-employed individuals with default insurance work just like those for salaried borrowers, if you can prove your income with your Notices of Assessment.
You’ll have to obtain insurance if you make a mortgage down payment equal to 5–19,9% of the home’s purchase price. If you can provide a 20%+ down payment, you’re not obliged to get insurance.
Uninsured mortgage rates, on the other hand, are typically a bit higher than insured rates because they don’t benefit from the CMHC guarantee/securitization that lowers lenders’ funding costs. Also, uninsured borrowers must qualify under OSFI’s stress test at the higher of their contract rate + 2% or 5.25%.
When you apply for a mortgage with reasonable proof of current income, all major Canadian providers of home loan insurance offer competitive insurance rates:
- If your down payment is within the 5-9.99% range, you’ll be charged a 4% premium.
- If your initial deposit is a bit higher, between 10% and 14.99%, your insurance rate will be 3.10%.
- If you provide a 15-19.99% down payment, the insurance premium decreases to 2.80%.
- If your down payment is 20% and higher, which means you’re more likely to pay off your mortgage faster, you won’t need to have your mortgage insured.
If you’re looking for more tips on applying for a mortgage online or need personalized assistance, don't hesitate to speak to one of our mortgage specialists. We’re always happy to help you in any way we can.