Mortgage Basics

Self-Employed Mortgage Options in Canada

Self-Employed Mortgage Options in Canada
Written by
  • Ashley Howard
| 11 October 2024
Reviewed, 28 October 2024
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    Qualifying for a mortgage requires some extra preparation for self-employed individuals in Canada. Traditional lenders may require more detailed income verification, while alternative lenders may offer more flexible options for those self-employed seeking a mortgage. 

    This guide will explain the requirements for self-employed mortgages, lender options, and tips for improving your chances of getting approved.

    Key Takeaways

    • Self-employed mortgages help those with non-traditional income sources qualify for a mortgage. 
    • Self-employed individuals require more stringent proof of income to qualify for traditional mortgages.
    • Prime, subprime, and private lenders have differing qualifying criteria for self-employed mortgages.

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    Qualifying for a Self-Employed Mortgage

    Your financial documents will play a critical role in qualifying you for a mortgage as a self-employed individual in Canada. Unlike salaried employees, self-employed individuals often have fluctuating incomes, making traditional lenders more cautious when lending. Lenders want proof of consistent income to ensure you’re financially stable enough to handle a mortgage. 

    Self-employed individuals typically fall into 1 of 4 categories when qualifying for a mortgage. The type of documentation you require when applying for a mortgage will be determined depending on which category you fall into as a self-employed individual. 

    1. Sole proprietor (with verifiable income) – Requires at least 2 years of verifiable (taxed) income from T1s and Notice of Assessments (NOAs)
    2. Sole proprietor (no verifiable income) – Requires a minimum of 6 months of business deposit history.
    3. Incorporated individual (with qualified income) – Requires a minimum of 2 years of verifiable (taxed) income from T1s and business financial statements. 
    4. Incorporated individual (without qualified income) – Requires a minimum of 6 months of deposits or stated income. 

    Documents Required for Self-Employed Mortgages

    Self-employed mortgages require, at minimum, your Income Tax Statement (T1) and Notice of Assessment (NOA) to qualify for a mortgage when you cannot provide T4s. 

    Typically, lenders have 4 primary document requirements that they will request:

    1. Notices of Assessment (NOA) and Income Tax Statements (T1) – Lenders may require T1 or NOAs from the last 2-3 years to verify your income, including self-employed income reported as business income. NOAs are also used to see if you have any unpaid taxes, and lenders will consider this a red flag, as the CRA could register a lien against your home or seize assets if taxes remain unpaid. 
    2. Articles of Incorporation, Business Number Registration, or GST/HST Account Number – These show the lender the length of time you have been self-employed or have run a business. If you make more than $30,000 in any quarter of a calendar year or the previous 4 or fewer consecutive fiscal quarters as revenue or gross sales, you must register for a GST/HST number
    3. Bank Statements – Your T2 corporate income tax return and bank statements from your business accounts can provide additional proof to back any business income claims. 
    4. Financial Statements – These are used to prove business income and are helpful when non-traditional income is verified so that the lender can consider both personal and business income. 

    Depending on the lender, you may require more documents to support your application, including:

    • Credit scores/ratings (personal and business)
    • Proof of full HST and/or GST payments
    • Proof of principal and majority business ownership
    • Signed contracts that show previous and future potential or expected revenue
    • Proof that downpayment funds are not gifted

    You may also include dividend income from an RRIF, LIF, etc., provided you can show a 2-year stability period and a guarantee of continued income through the mortgage term. 

    Lender Options for Self-Employed Mortgages

    Self-employed borrowers have several lender options when getting a self-employed mortgage. The lender options available will depend on whether you have documented verifiable income.

    Prime Lenders (A Lenders) 

    Prime lenders include major Canadian banks and credit unions offering competitive interest rates. They tend to have the strictest qualification criteria requiring borrowers to pass the stress test. Some prime lenders offer mortgages tailored to self-employed individuals. However, they have strict documentation requirements, including high credit scores and comprehensive income verification.

    Alternative (B Lenders)

    Subprime or B lenders offer more flexibility with income verification, accepting borrowers with inconsistent income or lower credit scores. B lenders do not provide default-insured lending, which allows them to be more flexible with their lending criteria. However, their interest rates are higher than those of prime lenders. 

    B lending is the most common solution for self-employed borrowers who have 20% or more as a downpayment. They can provide exceptions on debt-to-income (DTI) ratios if the borrower lacks personal income when registered as a corporation.  

    Private Lenders

    Private lenders can offer even more flexibility for those unable to qualify with A or B lenders. They focus more on the property’s value and may overlook lower credit scores or limited income documentation. However, private lenders usually charge higher rates and may require a larger downpayment. Private lenders are typically a temporary financing solution and need an exit strategy. 

    Mortgage Default Insurance for Self-Employed Mortgages

    If you can provide proof of income through T1s and NOAs, you will have access to traditional mortgages and get the same treatment as borrowers who provide T4s with traditional income sources. If you have a downpayment of less than 20%, you will need mortgage default insurance. The insurance premium is calculated based on the loan amount and the downpayment size. 

    If you have proof of income through T1s and NOAs, insurers like CMHC, Canada Guaranty and Sagen have the following default insurance premiums. 

    Downpayment 5% – 9.99% 10% – 14.99% 15% – 19.99% 20% +
    Insurance premium 4% 3.10% 2.80% 0%

    If you cannot provide proof of income and have limited or non-traditional documentation, private insurers Canada Guaranty and Sagen allow borrowers with a strong credit profile to access self-employed mortgage insurance. A minimum downpayment of 10% is required, and you will need a lender that offers business-for-self (BFS) mortgage programs through these private insurers.

    Downpayment 5% – 9.99% 10% – 14.99% 15% – 19.99% 20% +
    Insurance premium Not applicable 5.85% 3.75% 3.30%

    Stated Income Mortgage

    With a stated income mortgage, lenders won’t verify your income through traditional methods. Instead, you sign a declaration and declare your income within reasonable limits. With this type of mortgage, you are often not required to provide extensive documents to prove income.  However, the stated income must be considered reasonable compared to average incomes in your business or industry. You may use bank statements and invoices to verify stated income.

    Insured stated income mortgages allow downpayments as low as 10% but require default insurance and a good credit score. If you have a less-than-ideal credit score, you may need to offset this with a higher income to lower debt-to-income ratios or provide a larger downpayment to increase your chances of being approved. CMHC does not insure stated income mortgages, so you must use a private default insurer like Canada Guaranty or Sagen. o see how much property prices are predicted to appreciate. This can help you determine if the additional costs of a high-ratio mortgage today will save you money compared to purchasing at future home prices.  Waiting until you have a larger downpayment saved in a few years could delay your home purchase even more as rising prices impact your affordability.

    Frequently Asked Questions

    Can I get a mortgage without complete income verification?

    Some non-prime lenders offer more relaxed income verification requirements for self-employed mortgages. However, you may face higher interest rates and larger downpayment requirements.

    What documents do self-employed individuals need for a mortgage?

    Most lenders require 2 years of Notices of Assessment, business financial statements, T1 General, and bank statements. Depending on the lender, you may be required to provide additional documentation.

    How much can I borrow as a self-employed person?

    Your borrowing capacity depends on several factors, including income, credit score, debt levels, property value, downpayment, and the lender you choose.

    Final Thoughts 

    Getting a mortgage as a self-employed individual in Canada may require more preparation and documentation, but it’s achievable. Start by organizing your financial documents, working on your credit score, and exploring different lender options to find one that fits your unique situation.

    If you’re ready to start your self-employed mortgage journey, contact our mortgage professionals today to explore your options.