While many Canadians take advantage of being self-employed, they sometimes face roadblocks when in the market to obtain financing.
When applying for a mortgage, the lender usually requires proof of steady income, typically in the form of paystubs. Given that self-employed individuals often draw less income in order to reduce their personal income tax, a self-employed mortgage is often the perfect solution.
There is some good news. While securing a great mortgage for a self-employed person can be a bit more challenging, it isn’t impossible.
Mortgage lenders often consider self-employed borrowers as higher risk as there is no guarantee of their income. Typically, there is a lot more paperwork and a more thorough underwriting process that happens with a self-employed applicant.
Although the mortgage application process is similar between an employed and self-employed borrower, the documentation is very different. For an employed borrowed, it’s typically a letter of employment, 2 paystubs, 2 years T4’s and your last Notice of Assessment from CRA to show you don’t owe them money. For a self-employed borrower, it is required to provide 2-year T-1 Generals and Notice of Assessments as well as 2 years corporate financials prepared by an accountant. You also have to show proof that you own the company through the articles of incorporation. If you are a sole proprietor, they require 2 years of T-1 Generals with the statement of business activities.
Lending Standards for self-employed are tough
Lending standards are pretty tough for self-employed borrowers and require a little extra effort. You need to plan ahead before buying a home since the income used to qualify is your net income rather than your gross income. You will want to pay extra attention to not write off so many items for 2 tax years. There are some stated income programs available and knowing how to qualify for them is important.
There are verifiable self-employed mortgages and there are mortgages with less income verification however they typically come with a little higher interest rate.
Lenders view self-employed income differently and working with a trusted mortgage broker who knows the rules can significantly increase your chances of approval.