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Mortgage Maestro makes mortgages easy. Continue reading to learn more about mortgages, the latest industry updates and meeting your financial goals.

Self-employed mortgages in Canada

Self-employed mortgage applicants face more challenges than conventional borrowers including, greater scrutiny, extensive paperwork, and lower negotiation power. With the real estate market rising across the country, borrowers are looking for quick mortgage approvals. We can help you navigate these challenges by sharing lender requirements for self-employed mortgages.

Self-Employed Mortgages in Canada

Self-employed mortgages in Canada

Self-employed mortgages are designed for borrowers that rely on self-employment or business income. Many lenders consider self-employed mortgages extremely high risk as they have less predictable income compared to salaried employment. The income for self-employed individuals is calculated differently as most of them pay their taxes through their business, making their income look significantly low. Although self-employed individuals need to meet higher income qualifications to secure a mortgage, it is not impossible.

Requirements for a self-employed mortgage

High credit score

A high credit score is a critical requirement for self-employed mortgages along with proof of income. Some lenders will also consider your credit history if you don’t have proof of income. In some cases, you may have to share both your personal and business credit history with a lender. The higher your credit score is, the lower are the offered interest rates. A good credit score also increases your chances of receiving mortgage approval.

Tax notices of assessment

Most lenders will require you to submit a personal tax Notice of Assessment for the last 2-3 years. They will use the tax assessments to qualify you for the mortgage.

Proof of income

Most lenders require proof of income (qualified or stated income) and, if it meets their requirements, you can get access to the same mortgage products and interest rates as conventional borrowers. Unfortunately, if you have done a great job of ensuring your stated income is much lower than your gross income, it will be challenging to qualify you through income only. In such a scenario, you will stand a greater chance if your credit score is high.

Some lenders understand the income challenges self-employed applicants face and require limited or no documentation to help maximize the chances of mortgage approval. Some lenders also accept your stated income including, the amount not declared in your tax returns, as proof. While you do not need to verify your income, stated income mortgages come with higher interest rates. Also, you have to be self-employed for at least two years for a lender to consider your income.

Down payment

With sufficient proof of income, mortgage lenders will require a minimum of 5% down payment; however, with insufficient proof of income, you may need to make a minimum down payment of 10%. While a larger down payment will not increase your chances of approval if other requirements are unfulfilled, it will help lower your debt-to-income (DTI) ratio. The debt-to-income (DTI) ratio is the percentage of your gross monthly income used to pay debts and is used by lenders to determine your borrowing limit. A lender will consider your mortgage less risky if you make a large down payment.
Here is a list of documents a lender may require:

  • Financial statements for your business (income, expenses, debt, etc.).
  • Any contracts showing future source of income (some lenders will look at the future expected income).
  • Proof of your HST (and or GST) payments in full.
  • Your business ownership documents to prove that you are the principal owner.
  • A copy of your GST or borrower’s business license or Article of Incorporation showing you are licensed.
  • Bank statements to prove that your down payment is not a gift.

Other types of mortgages available for self-employed borrowers

If you are self-employed and already own a property, you can leverage it to get a second mortgage. Here are some options to get a mortgage if you already have a primary residence:

Home equity line of credit (HELOC) – You can access your home equity to acquire a line of credit. The amount you can borrow will depend on your LTV (loan to value) ratio.

Second mortgages – These are secondary loans secured against an already acquired equity. Your first mortgage (for your home purchase) acts as collateral for the second mortgage.

Home refinancing – You can use this mortgage to pay existing loans or consolidate debts.

Private mortgages – Getting a private mortgage is always an option if you don’t own a property.

Mortgage default insurance for self-employed mortgages

Self-employed mortgages have the same insurance requirements as conventional mortgages. With sufficient proof of your income through personal tax Notice of Assessment and a down payment of 5%-19.99%, you are required to get mortgage default insurance. The premium will be added to your monthly payments and paid over the life of the mortgage. If you make a down payment of 20% or more, you don’t need mortgage default insurance.

Without sufficient proof of income, the minimum down payment is 10%. You also have to find a lender who uses Genworth and Canada Guaranty. Canada Mortgage and Housing Corporation (CMHC) no longer offers insurance for self-employed mortgages without sufficient proof of income.

Interest rates for self-employed mortgages

In most cases, self-employed mortgages are offered at higher interest rates than conventional mortgages, even if both applicants have a similar financial situation. The interest rates may be fixed or variable. A high credit score and a 20% or more down payment will most likely improve your chances of getting a low-interest rate. To maximize your credit score, be sure to make all your debt and bill payments on time. Also, maintain a low debt-to-income (DTI) ratio as it will be central to whether the lender approves your mortgage application. The standard market DTI requirement is 43% or lower.

How much can you borrow with a self-employed mortgage?

If you have mortgage default insurance with CMHC insurance, you may be eligible for up to 95% loan-to-value ratio and up to 90% with private insurers. Without mortgage default insurance, you may qualify for a mortgage up to 80% of the purchase price of your home. The borrowing limit will vary with different lenders.

If you are self-employed, Mortgage Maestro can help you find the best interest rates.