How to qualify for a mortgage when you're self-employed
Ten years ago 387,200 British Columbians were self-employed. Today, this number has
increased by 18 to 416,500. Nearly one in every five British Columbians now works
for themselves. When it comes time to getting a mortgage or refinancing an existing
rnortqaqe, self-employed workers are treated differently from salaried employees.
Who is self-employed?
Typically, lenders at financial institutions consider someone self-
employed if they:
- run a business alone as a sole proprietor, with a partner, or as a corporation;
- receive 25 or more of their income from the business;
- work on short contracts for different employers; or
- are paid solely on a commission basis.
In contrast, a salaried employee is someone who receives a
regular paycheque from an employer, or even several paycheques
for part-time work for multiple employers.
Different rules for the self-employed
Since 2011, the federal Department of Finance has imposed
a range of stricter rules on mortgages for all borrowers, for
- reducing maximum amortization periods to 30 from 35 years;
- restricting the percentage borrowers can refinance; and
- requiring borrowers with less than a 20 downpayment to meet standards for a five-year fixed rate mortgage.
For the self-employed, new rules brought in two years ago
by Office of the Superintendent of Financial Institutions require
anyone working for themselves applying for a mortgage or
refinancing from a federally-regulated financial institution to
have a minimum downpayment of35 ofthe home price.
The mortgage must also be insured by Canada Mortgage and
Housing (CMHC), Genworth or Canada Guaranty.
Credit Unions, however, are not federally regulated and may
require self-employed workers to have a downpayment as low as
20 without requiring mortgage insurance.
Self-employed need proof
Self-employed borrowers will have to prove they have a viable
business, a good credit rating and a good history of paying bills
and loans on time.
Borrowers in business for three or more years are required
to verify net taxable income - what remains after business
deductions are subtracted from gross earnings.
Lenders will want to see the past two years of these documents:
- monthly bank statements;
- Canada Revenue Agency assessment notice;
- business balance sheet and profit-and-loss statement;
- business credit card statements; and
- credit references or letters from financial institutions.
Lenders may also ask for a letter from the borrower's
accountant, proof that rent is paid on time, and a personal balance
sheet showing assets such as stocks, and debts such as credit card
or car loans.
Self-employed borrowers in business for three or more years
are required to verify net taxable income - what remains after
business deductions are subtracted from gross earnings.
Self-employed borrowers in business for less than three years
will also be required by CMHC (or other mortgage insurers)
to complete a stated income application. For information on
CMHC's program for self-employed, see: www.cmhc.ca/enl
Averaging net income
Just because a self-employed worker had a net income of
$120,000 the previous year, does not mean they will qualify for a
mortgage based on this amount.
Instead, a lender determines the amount a self-employed
borrower will qualify for by reviewing several years of earnings
and averaging them.
For example, a self-employed borrower's income for the last
three years might be analyzed as:
Average net income = $76,666
The lender will base the amount loaned on the average income
Source: Real Estate Board of Greater Vancouver