April 30, 2019

Mortgages for Self-Employed Borrowers

Mortgages for Self-Employed Borrowers

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There are a lot of benefits to be being self-employed but qualifying for a mortgage isn’t one of them.

When it comes to mortgages, it hasn’t always paid to be self-employed. Here’s why!

First, let’s understand who falls into the “Self-Employed” category. 

These are individuals who sell services under a short-term contract vs. a traditional employment contract. Contractors and consultants are not employees. They do not receive a periodic paycheck. They receive payments in exchange for the services that they sell to organizations or individuals. Examples of contractors and consultants are included in the table below.

It ConsultantsBusiness Consultants General Contractors Seasonal Professionals Vocational Professionals
– Graphic Designers
– Developers
– Tax Planners
– Copywriters
– Handymen
– Plumbers
– Painters
– Construction workers
– Lifeguards
– Lawn care
– Camp Counselors
– Physical therapists
– Nurses
– Pharmacists

These are individuals who run corporations to sell goods and/or services. Businesses can range in sizes from small, one employee shops to large multi-staff organizations.  Business owners earn money when they sell goods or services. Therefore, their revenue is not always predictable and can fluctuate due to various internal and external factors. Examples of business owners are included in the table below.  

Health CareFinancialLegalSmall Business
– Doctors
– Veterinarians
– Dentists
– Optometrists
– Cosmetic Surgeons
– Bookkeeping
– Financial Planners
– Injury lawyers
– Real Estate lawyers
– Litigation
– Dry cleaning
– Convenience stores
– Restaurants
– Health and Beauty stores

Beyond the two categories discussed above, there is a third category – sales or commission-based employees. While these individuals are technically not “self-employed”, they have earned a place on this list because they face similar problems as self-employed borrowers do while shopping for a mortgage.  They cannot prove a steady stream of income as their revenue is directly proportional to what they sell. Examples include, car salesman, realtors, mortgage brokers, medical representatives, insurance representatives, etc.

Next, let’s look at why it is hard to qualify for a mortgage as a Self-Employed borrower.

  1. Income Unpredictability – Self-Employed income is not always predictable and can fluctuate due to various internal and external factors governing the respective industry. As a result, banks are always wary of the borrower’s ability to make monthly mortgage payments in a period of down sales cycle.
  • Difficulty in Proving Income – Since income is not easy to prove, banks require a series of supporting documentation to lend credibility to the borrower’s ability to make mortgage payments.  These include:
    • Personal tax Notices of Assessment from the past 2-3 years
    • Financial statements for the business
    • Proof that the HST and/or GST is paid in full
    • Contracts showing expected revenue for the coming years
    • Personal and business credit scores
    • Proof of business ownership
    • A copy of the borrower’s business or GST licence or Article of Incorporation
  • Double-Edged Sword of Tax Planning – Many business owners are motivated to expense as much as possible in order to minimize the taxes that they pay. This is a double edged-sword, as while reducing their taxable income, they are making it difficult to qualify for the mortgage that they can afford. This is because lenders only consider a borrower’s net declared income on his / her personal tax return (not corporate) to establish mortgage affordability.

So, what are your options?

Traditional Lenders

Those who are able to provide proof of income documentation can generally access the same mortgage products and rates as traditional borrowers, while those who cannot must at least have a good credit history and provide a minimum down payment of 10%. Under both scenarios, with a traditional lender, a self-employed borrower’s affordability might be limited to the net declared income* on his/her personal tax return – which in most cases is understated.

Alternative Lenders

We work with Alternative Lenders that offer a range of mortgage products for self-employed Canadians. These lenders understand that self-employed borrowers have tax write-offs creating significant reductions in their declared income. Alternative lenders are less fussed about self-employed duration and consider a borrower’s gross income based on the cash flow in the business. This increases the loan amount that a borrower can qualify for. See Illustration below.

BorrowerTraditional LenderAlternative Lender
Corporate Net Income: $100KIncome used to qualify: $36KIncome used to qualify: $80K
Personal Net Income: $30KIncome used to qualify: $36KIncome used to qualify: $80K
Loan AmountMax. $160KMax. $160K

Needless to say, the mortgage gods are not partial to self-employed borrowers. Navigating through the qualification and documentation requirements can be quite onerous. Let us help you navigate these complexities – get in touch today for a free, no-obligation consultation.

*Note: Traditional lenders do offer some stated income programs. Contact us for more info on these programs.