How To Get a Mortgage When You’re Self-Employed

The biggest difference between a self-employed mortgage applicant and one with a full-time job can be summed up in one word: documentation. As a self-employed person, you must come prepared with as much paperwork as possible to prove you can be a responsible borrower.

Every lender has different requirements, but here are some commonly accepted forms of documentation for self-employed mortgage applications.

• Personal tax returns (T1 General) for the past two to three years
• Notices of Assessment (NOA) from the CRA for the past two to three years
• Financial statements for your business (if you’re incorporated)
• Proof of business ownership (e.g., business license, articles of incorporation)
• Personal and business bank statements for the past six to 12 months
• Contracts or invoices
• Proof that your HST/GST payments are up to date
• Statement of Business Activities (Form T2125) if you’re a sole proprietor
• Corporate tax returns (T2) for the past two to three years, if you’re incorporated
• Proof of down payment and its source

If you have any questions about the documents you need, don’t hesitate to contact your mortgage broker or a representative from your lender.

Once you’ve gathered all of your paperwork together, you’ll need to figure out how to prepare your application. This isn’t as straightforward as it might be for someone with a full-time job. Self-employed people often have to think much harder about their financial profile, especially when it comes to mixing personal and business income.

Here’s a step-by-step list of how to prepare your mortgage application:

1. Assess Your Business and Personal Finances

Start by conducting a thorough review of your financial situation. Lenders typically look at your past two years of income, so pay special attention to any documents from this period. You’ll also want to separate your personal and business finances and emphasize the consistency of your income stream. This will show your lender you are a responsible and stable borrower.

Many self-employed people try to write off business expenses through tax deductions. While it’s tempting to lower your tax bill as much as possible, it can also impact your borrowing capacity.

Claiming too many business expenses as tax deductions reduces your declared income, which lenders use to assess your borrowing capacity. A lower declared income can make it harder to qualify for loans or result in less favourable terms. Keeping separate bank accounts for business helps show a clearer picture of your financial health to lenders.

Working with an accountant who understands the needs of self-employed people can guide you through this process. They can help you manage your finances in a way that not only saves on taxes but also makes you look like a solid candidate when applying for a mortgage.

2. Check Your Credit Score

Your credit score is crucial when applying for a mortgage. While there is no hard and fast rule, a strong credit score of 680 or more can help offset some of the perceived risks of a variable income in the eyes of a lender.

It is a good idea to obtain your credit report from both major Canadian credit bureaus (Equifax and TransUnion) and review it for errors, disputing any inaccuracies. Credit Karma, Borrowell, or some other free credit score app can be a powerful tool that can give you a decent estimate of your credit score.

Pay all bills on time, including credit cards, utilities and any existing loans. Setting up automatic payments can ensure you never miss a due date. Lenders are always curious about your credit utilization ratio, which is the amount of revolving (i.e. , repayable) credit you’re borrowing at any one time minus the total amount available to you.

If you have a credit card with a $3,000 limit, for instance, and you have $1,500 on it, you’re using 50% of your credit utilization ratio. The best way to keep a lender happy is to use less than 30% of your ratio at any one time. This will further boost your credit score.

3. Keep Your Expenses Low

When applying for a mortgage, lenders lump together many of your expenses, debts, and other financial obligations into two numbers: the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.

The GDS ratio includes all your mortgage payments, property taxes and heating expenses compared to your total income. Lenders use it to ensure you’re not overextending yourself financially. Most want to see a GDS ratio below 39%. Meanwhile, the TDS ratio includes everything in the GDS plus all your other debts like credit cards, car loans, and student loans. Lenders generally prefer all expenses in the TDS to be under 44% of your income.

To lower these ratios, pay down existing debts, especially high-interest credit cards, before applying for a mortgage. This improves your debt-to-income ratio, making you more attractive to lenders when applying for a mortgage. Prioritizing high-interest debt also helps you save money in the long run by lowering your total interest payments. For example, if you have $10,000 in credit card debt at 21.99% interest, prioritize paying this off. Avoid taking on new debts, including car or personal loans, in the months before your application.

Consider consolidating high-interest debts into a single loan. While this doesn’t always guarantee a lower interest rate, it can reduce your monthly payments by extending the repayment term. However, a longer payback period means you might pay more interest over the lifetime of the loan. Before consolidating, carefully compare the terms, interest rates, and total cost of the new loan against your existing debts.

In some cases, you might secure a lower rate, especially if your credit score has improved since you took out the original debts, but this isn’t guaranteed. The main benefit of consolidation is often simplifying your finances by having a single payment to manage.

Related: Pros And Cons Of Debt Consolidation

4. Do Your Due Diligence When Choosing a Lender

Not all lenders have the same policies for self-employed borrowers. It is smart to research multiple lenders, including the Big Six Banks, credit unions and alternative lenders. Look for those with specific self-employed mortgage programs.

Consider working with a mortgage broker who has experience with self-employed clients. They can access multiple lenders and help you find the best fit. Don’t just focus on interest rates; consider the overall package, including prepayment privileges, portability options and the lender’s experience with self-employed borrowers.

Remember that self-employed individuals sometimes need to provide a higher down payment, typically around 30%, due to their perceived higher risk by lenders. This larger down payment helps offset the lack of a steady income and demonstrates financial stability.

In general, it is a good idea to use a lender’s mortgage affordability calculator to estimate how much you qualify for based on your income and existing debts. This can help you set realistic expectations and identify areas for improvement when crafting your mortgage application.

Self-employed Canadians have several mortgage options available to them:

• Traditional Mortgages: If you can provide sufficient proof of income, you may qualify for the same mortgages as a full-time employee. Usually, a traditional mortgage at a major financial institution will offer the best interest rates and terms.

Related: Best Mortgage Rates

• Stated Income Mortgages: These allow you to declare your income to a lender without providing extensive documentation. However, they typically come with higher interest rates than traditional mortgages and require a larger down payment, usually a minimum of 10%. These are not guaranteed mortgages— the lender decides whether your stated income is reasonable for your industry and experience.
• Business for Self (BFS) Programs: Many lenders offer specialized programs for self-employed individuals with more flexible income verification requirements than a typical mortgage. A BFS Program might consider bank statements, contracts, or a two-year average of your income tax NOA. However, they often come with trade-offs. Interest rates may be higher than standard mortgages, reflecting the perceived increased risk. Usually, a larger down payment is required, typically 10% or more. Some self-employed individuals may still not qualify if their business is too new (less than two years old) or if they have inconsistent income. It’s also worth noting that while income verification is more flexible than a traditional mortgage, credit score requirements can be stricter.
• Alternative Lender Mortgages: Self-employed borrowers who don’t qualify with traditional banks may find mortgage options with alternative lenders like B-lenders and private lenders. These mortgages typically have significantly higher interest rates, often 2% to 4% above traditional rates, and may include additional fees. However, they serve a crucial purpose: Allowing individuals to obtain a mortgage when they otherwise couldn’t while providing an opportunity to build a credit history and demonstrate income stability. Many borrowers use these as a short-term solution, aiming to refinance with a traditional lender at a better rate after one to two years of consistent payments. While initially more expensive, these options can help self-employed individuals buy a home.

Do Not Add More Debt

Avoid taking on new debt or making large purchases during the mortgage application process. New debt can increase your debt service ratios, potentially disqualifying you from the mortgage. Even small increases in your monthly obligations can impact your application. Financing a new car or maxing out a credit card could be enough to push your ratios over the acceptable limits. Even signing up for a new phone line, which can result in a hard credit check, can affect your credit score.

 Prepare Your Down Payment

A larger down payment generally improves your chances of approval and can secure better interest rates. Aim for at least 20% down to avoid mortgage default insurance, which comes with more fees. For instance, on a $500,000 home, a 20% down payment of $100,000 saves you the CMHC insurance premium and can reduce your monthly payments and total interest paid over the life of the loan.

However, it’s worth noting that in some cases, a lower down payment plus CMHC insurance can result in lower interest rates. Always compare different scenarios to determine the best option for your specific situation.

Be Patient

The mortgage approval process for self-employed individuals often takes longer than for traditional borrowers. Lenders may need more time to review your complex income structure and additional documentation.

This process could take several weeks or even months, compared to a week or two for less complex cases. Use this time to ensure all your documents are in order and be prepared to provide additional information if requested.

Getting a mortgage when you’re self-employed is absolutely possible. You just have to have all your ducks in a row and ensure you have all the necessary documentation before starting. It’s also best to work with a mortgage broker with access to various lenders, including those known to lend to self-employed individuals at reasonable rates with favourable terms.