Are you self-employed and looking to become a homeowner? Obtaining a mortgage may be more difficult for you than for a typical salaried worker with a stable income. Fortunately, there are several options to help you achieve your goal.
Mortgages for self-employed workers: eligibility and required documents
Several institutions offer mortgages for self-employed workers. While very similar to traditional mortgages, these loans have more flexible criteria and are specifically for individuals who earn an irregular income and who usually deduct business expenses from their eligible income.
What are the eligibility requirements?
As a general rule, you must have been self-employed or owned your own business for at least two years and have at least two years of declared income so lenders can calculate your average income and determine how much you can borrow. The criteria may vary depending on the type of self-employed worker and their status. Note that some banks may increase your net income by 15% to compensate for deducted expenses (e.g., home office, car, cellphone). You will also need to prove that your tax returns are up to date.
If your income is sufficient and your debt-to-income ratio does not exceed the ceiling set by the institution, you are well on your way to obtaining a loan. In general, the last thing you’ll need to do is demonstrate that you manage your finances responsibly (you usually need a credit score of between 600 and 680) and are able to make a minimum down payment of 5% to 10% of the property price. As you’ll see below, some lenders have slightly different criteria. The higher your credit rating and down payment, the greater your chances of obtaining favourable mortgage terms.
What documents and evidence do I need to provide?
To obtain a self-employed mortgage, you must provide your federal income tax returns along with your federal and provincial notices of assessment for the past two years. Depending on your self-employed status, you may be asked for additional documents. Examples include:
- Proof of payment of taxes
- Proof of ownership of your business
- Financial statements for your business
- Your personal credit score
- Contracts showing your previous income and your expected income for the next two years
- Proof of down payment based on the type of self-employed worker you are
What about mortgage loan insurance?
Offered by Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Sagen, mortgage insurance protects the lender in the event of default. For those able to prove their income, premiums vary between 2.80% and 4% of the mortgage balance and are calculated based on the size of your down payment, as with traditional loans. Mortgage insurance is not required if you make a down payment of 20% or more.
CMHC offers mortgage insurance to self-employed workers under the same conditions and with the same requirements as for salaried workers.
Special programs for self-employed workers
If you aren’t able to prove your taxable income, don’t earn enough to satisfy traditional lenders, or have a taxable income that doesn’t reflect your actual income, you have several options.
Private insurers Canada Guaranty and Sagen offer programs that enable borrowers with an excellent credit history to obtain mortgages with limited proof of income. Examples include fixed rate, standard variable rate, capped variable rate, and referenced rate mortgages. You must make a minimum down payment of 10% of the property’s value, with at least half coming from personal savings, and choose a lender that offers this type of mortgage. The required documents are essentially the same as those mentioned above.
Sagen’s Business for Self (Alt. A) Program
The Business for Self (Alt. A) Program allows borrowers to self-report earnings, provided they are reasonable based on the industry, length of operation, and type of business. Those with commission-based income are not eligible.
To qualify, you must demonstrate a maximum debt ratio of 39% (gross debt service ratio [GDS]) and 44% (total debt service ratio [TDS]), as well as responsible financial and credit management over a two-year period; have no reported defaults on residential mortgages in the last seven years; and have never declared bankruptcy. The property must have a value of less than $1,000,000 and no more than four units, one of which must be occupied by the owner. Lastly, the amortization period must not exceed 25 years.
Canada Guaranty’s Low Doc Advantage program
Canada Guaranty’s Low Doc Advantage program is very similar to Sagen’s Business for Self (Alt. A) Program.
Whichever you choose, expect to pay a higher mortgage insurance fee. You’ll also need to qualify at an interest rate that is the greater of the contract mortgage rate plus 2%, or 5.25%. Note that some lenders may slightly increase the interest rate.
Other programs that allow self-reported income
Equity loans
Equity loans are an attractive option offered by some financial institutions. Every lender sets its own eligibility criteria, but all applicants must meet certain minimum requirements:
- Be self-employed for at least two years
- Have an excellent credit history
- Have paid your taxes
- Make a down payment of at least 35% of the property price
Alternative loans
Equitable Bank, Home Trust, B2B Bank, Haventree Bank, and other alternative lenders offer programs enabling self-employed workers who don’t meet the requirements imposed by traditional lenders to access home ownership. To be eligible, you must meet the following criteria:
- Be self-employed for at least six months
- Make a down payment of at least 20% (25% for a condo)
These lenders allow a 30-year amortization period and are more flexible about where the down payment comes from. However, their interest rates are higher. ans et sont plus souples quant à la provenance de la mise de fonds. En contrepartie, les taux d’intérêt seront plus élevés.
Other options for buying a home when you’re self-employed
Private lenders
If you don’t meet the criteria of traditional or alternative lenders, have a poor credit history, don’t have a sufficient income or down payment, are only recently self-employed, or simply need money quickly or for a short period of time, you may want to consider a private lender.
Eligibility criteria vary from lender to lender, and some may even charge a fee for analyzing your file. In addition, because private lenders often take on more risk than banks, their interest rates are generally higher. Before accepting a lender’s offer, make sure the terms and conditions of the loan suit your situation. To avoid fraud, consider checking the company’s track record.If you have questions about obtaining a self-employed mortgage, don’t hesitate to contact a Multi-Prêts broker. After all, there’s no one who will understand your situation better than another self-employed worker! Submit a request today using our quick and easy online form.
Key takeaways
- Several major institutions offer mortgages for self-employed workers.
- Some may increase your net income by 15% to compensate for deducted business expenses.
- Options are available to borrowers who can’t prove their taxable income, who don’t earn enough to satisfy traditional lenders, or whose income doesn’t reflect their actual income.
- Private lenders typically have higher rates since they often take on more risk than banks.
- The higher your net worth, the greater your chances of obtaining good mortgage terms. The same goes for your credit rating and down payment.