What does it mean to be self-employed?

If you are:mortgages for self-employed
  • a business owner, regardless of the size of the company or if you T4 yourself
  • an independent contractor
  • derive most of your income from sale commission

… you are considered self-employed or business-for-self in the eyes of a lender.

There are 3 different programs for those you are in business for themselves

The main differences are:
  • length of time you’ve been self employed
  • how provable is your income – get more into provability as we go through the various programs
The answers to the above will determine:
  • down payment – ranges fro 5%-35%
  • what rate you will get
1. Provable Income

If you claim enough income on your taxes (line 150) to qualify for the mortgage amount you are applying for, then you can qualify like a salaried individual. Down payment for these individuals can be as little as 5% using one of the mortgage default insurer programs (i.e. CMHC). There are no rate premiums for this mortgage product.

2. Stated Income with documents

mortgages for self-employedSelf-employed borrowers (with less than 3 years business operation) without traditional forms of income validation can access insured financing for purchase transactions with only 10% down payment.

Stated income is the amount of income the borrower attests to having, and which can be supported with documents such as tax returns, notices of assessment, contracts and financial statements. A lender, for example, may require that business owners provide two years of financial statements and their two most recent Notices of Assessment.

The two years of financials tell us the strength of the business and the ability of the business to pay the business owner a reasonable salary for that business owner to have cash flow to repay debt. The Notices of Assessment tells the lender how much this person is actually reporting out back to the government as their income. There’s a balance between those two.

Business owners often report relatively small income after they have accounted for all of their expenses. As a result they’re usually not subject to the normal gross debt service and total debt service ratio formulas, but lenders do look for a reasonable reported income. For example, a notice of assessment indicating annual income of $5,000 and a request to borrow $60,000 would raise a red flag.

Lenders will also assess the borrower’s assets. If someone is applying for a $400,000 mortgage and his notice of assessment doesn’t show income that would normally support that but his business owns vehicles and expensive equipment, the credit union will have a closer look. Essentially, the lender needs to understand the borrower’s ability to service the debt they’re asking to take on. And the best way to do that is for the lender to get to know the business and the business owner as well as possible.

3. Stated Income low documents

There are products available through the alternative lending channel that will lend to self-employed individuals with a stated income letter only. Because the lender has not “gotten to know” the borrower and their entire situation through significant amounts of documentation, this is a far riskier situation for the lender.

There are no programs for this type of situation through the mortgage default insurers so the down payment will be at least 15%. For more risky individuals/properties, as determined by the lender, the down payment could be as much as 35%.

While these mortgages do not fall into a mortgage default insurer program, the lender will self-insure and therefore charge a fee of a similar magnitude to the mortgage default insurance premium (i.e. 1-2%).

In addition, because these types of mortgages are using the alternative lending channel, and there is greater risk to the lender, there is a corresponding rate premium of a minimum of 1.5% on top of the “going” rates.

Here is an example of what you will need to qualify for a business-for-self mortgage:

  1. Established and above average credit history
  2. Documents to confirm business ownership for 2 to 3 years

There is an interest rate surcharge if a borrower’s credit is below average, and/or if the business operation is less than 2 years Some of the documents that may be required to qualify for business-for-self mortgage financing are:

  1. Notices of Assessment and T1s General
  2. Business incorporation certificate and/or business license
  3. GST returns
  4. Bank statements for business account
  5. Catalogue, price list, supply invoices, contracts etc

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