Lawyers, realtors, graphic designers, general contractors – the job titles of Canadians who work for themselves vary considerably. But they all share the same hurdle when applying for a mortgage: proving their income.
Lenders look for proof of income stability when assessing a mortgage application. For traditional employees, a few pay stubs or a letter of employment might be all the evidence a lender needs. However, for Canada’s more than 2.6 million self-employed workers, proving income stability is a little more complicated. They may not have pay stubs, a formal employer (let alone a letter of employment), or even tax records that can properly confirm their annual income.
But that doesn’t mean self-employed Canadians won’t be considered for a mortgage. In fact, many lenders, including the Big Six banks, will accept self-employed applicants.
The process of applying for a mortgage as a self-employed person, on the surface, isn’t all that different from salaried workers. In many cases, the mortgage rates for self-employed workers can be just as competitive as those offered to salaried employees. It mainly boils down to whether a self-employed mortgage applicant can prove their income, and whether a lender trusts it enough to seal the deal.
Salaried employees applying for mortgages typically need to show their T4, a few recent pay stubs, and a letter of employment. Properly assessing a self-employed worker’s income, however, can be a little more complex.
“For someone who’s salaried, it’s super straightforward,” says Kam Singh, a sales manager at intelliMortgage who has handled many self-employed clients. “For someone who’s self-employed, we’re asking more questions. We’re understanding what the business does. Do they lease out space? Do they have employees? How long has the business been in place for? How do you report your income?”
Singh says someone who is self-employed typically needs matching notices of assessment from the CRA, T1 general tax forms, as well as the financial statements for their business. They may also need to show any relevant client contracts, as well as proof that they’ve paid their HST or GST in full. If a self-employed worker is incorporated, meaning they have a separate legal entity for their business, Singh says lenders will also ask for articles of incorporation to confirm how long the borrower’s company has been active.
“It’s not hard,” Singh says of the income verification process. “It’s just [about] knowing where to look.” That said, some brokers may choose to charge extra for self-employed clients as there’s a lot of paperwork to sift through.
Where it gets complicated for self-employed workers is when they use incorporation to separate their business and personal incomes. This can lower tax totals but can also make a mortgage application look riskier than it really is because it appears as though the applicant is making less money.
Some banks will only provide uninsured mortgage loans to the self-employed worth up to 65% of a home’s purchase price — anything higher than that and the borrower will have to get mortgage default insurance.
There are some banks, however, such as RBC, that offer self-employed mortgages. This mortgage allows a self-employed person to make a 20% down payment and borrow up to 80% of their home’s purchase price without having to pay for mortgage default insurance — the same option available to someone seeking a traditional mortgage. The borrower’s notice of assessment must show sufficient income, though.
Singh’s advice for any self-employed worker eying a mortgage is to talk to a broker or accountant well in advance. Getting a sense of how much one could qualify for, as well as any paperwork or conditions that need to be met, could save applicants a lot of stress.
While a self-employed income can be tougher to verify than that of a 9-to-5 permanent staffer, lenders are willing to extend loans under the right conditions.
“Any deal can be done,” says Singh. “It’s a matter of where you fit best.”