Mortgages for the self-employed are designed specifically for borrowers who derive their income from their own business or self-employment rather than from a salaried job. The fundamental distinction between the two is that self-employed people often have variable income, whilst those who are employed receive regular paychecks every biweekly or monthly.
The lender takes your net income from your most recent tax return into account when you apply for a typical mortgage in accordance with standard procedure. Due to tax deductions and reported costs, the amount for self-employed people is typically lower. A self-employed mortgage in Canada takes this into account and typically gives the potential borrower some latitude in how they disclose their income.
Self-employed borrowers who own full- or part-time enterprises that include partnerships, corporations, and sole proprietorships can obtain a non-traditional mortgage known as a self-employed mortgage. Individuals who are self-employed through an incorporation must own the corporation and receive a salary or dividend from it in order to qualify.
Getting a Mortgage When Self-Employed
You must have worked in the same position or run your business for a minimum of two years in order to be eligible for a self-employed mortgage. In essence, two years of accounts can be used to evaluate mortgages for self-employed people. The most typical minimum is two years, while some lenders or situations may ask for up to three years. This responds to the question, “How long do you have to be self-employed.”
The mortgage application must be accompanied by personal tax Notices of Assessment for the previous two to three years. In contrast to self-employed mortgage rates, using this proof of income may allow you to take advantage of the same products and rates as traditional borrowers.
Types of Self-Employed Income Verification
There are three major verification types based on the income declared:
- Traditional Income
- Non-traditional income
- Stated income
Personal tax returns can be used to confirm traditional income, which is the classification normal employment income falls under. For the majority of self-employed business owners wanting to verify their “actual” income, this form of verification is probably ineffective.
The individual tax return does not accurately reflect this situation’s revenue. Instead, genuine income can be confirmed using the company’s financial filings and bank statements. The majority of self-employed people fall into this category. This is also true for the majority of mortgages for first-time contractors.
This is also known as “mortgages without income verification.” It simply suggests that neither of the approaches mentioned above will work and that the borrower won’t be able to prove their source of income. The majority of B Lenders and private lenders accept this verification technique. With the Sagen Alt-A Program, which is offered by some A Lenders, it is permitted, however this program is very stringent.
Note: Typically, borrowers who are able to prove their income using the traditional manner receive loans with the lowest down payments and interest rates. Non-traditional income verification entails making a larger down payment, has a higher interest rate, and can call for mortgage default insurance. Stated-income mortgages have limitations on the types of properties that may be bought and include the highest mortgage rates and a down payment of all three methods.
Required Documents for a Self Employed Mortgage
A self-employed mortgage fundamentally requires your Notices of Assessment and Income Tax Statement (T1); this is the basics for how to qualify for a mortgage when self-employed.
Depending on the lender, you may be required to provide the following:
- Personal and business credit scores
- Financial statements for your business
- Proof indicating full payments of your HST and/or GST
- Proof of principal ownership in the business
- Contracts showing previous and potential/expected revenue for the next couple of years
- Copy of GST license or Article of Incorporation proving that you are licensed or a copy of your business license
- Evidence indicating that your down payment was not a gift
Both dividend income and regular investment income are acceptable for mortgage purposes as long as you can prove a 2-year period of stability and a guarantee of ongoing income for the duration of the mortgage.
The Notice of Assessment and Income Tax Statement (T1) is required by lenders since it often comprises all of your income, including any self-employment income that is declared as company income and any unpaid taxes.
If you are unable to pay off your debts due to unpaid taxes, the Canada Revenue Agency (CRA) may record a lien on your house, seize your assets, and sell them. Lenders view unpaid taxes as a red flag, so they will at the very least evaluate your Notice of Assessment or T1 General income tax filings for the past 2-3 years to look for any.
Business Number Registration or GST/HST Number
This normally gives details about how long you’ve been working for yourself or managing your firm. Corporations can only use articles of incorporation. You must also have a GST/HST number if your revenue or gross sales total more than $30,000 during one quarter of a full calendar year.
Your T2 Corporation income tax return and bank statements from your business account can both be used as further evidence to support your claims of business income. Contracts that have been sealed and signed may also result in future income.
Financial records can be used to demonstrate firm revenue. This is especially helpful if you want the lender to take into account both your personal and business income during non-traditional income verification.