However, their path to owning real estate tends to be a bit different (and often bumpier) than that of a regular employee. The problem is that self-employed borrowers have to jump through extra hoops just to prove their income can support a mortgage, and that’s where confusion and mistakes often creep in.
The good news? With the right guidance and a bit of extra effort, anyone can enter the Canadian real estate market.
In today’s piece, we’ll discuss several common mistakes self-employed workers in Canada often make when looking for financing, and what you can do to avoid them. But first, let’s unravel the main challenges you’ll face.
Challenges that keep self-employed borrowers in limbo.
As we’ve already stated, a self-employed borrower in Canada has to go through a lot more red tape than a salaried employee. This is because traditional lenders (a.k.a. banks) see their source of income as volatile and unpredictable.
To qualify as a self-employed borrower for a mortgage in Canada, banks will have you jump through hurdles, such as:
- Lots of of paperwork: Most lenders demand at least two full years of self-employment history in the same industry. For this, you’ll need to produce T1 Generals and Notices of Assessment (NOAs) for the last two to three years.
- Net income suppression: By maximizing business expenses to lower taxable income, self-employed workers inadvertently lower their Total Debt Service (TDS) and Gross Debt Service (GDS) ratios. This happens because lenders typically look at Line 15000 (formerly Line 150) on your tax return.
- The stress test: Self-employed borrowers must qualify at the contract rate plus 2%, or the floor rate (whichever is higher). Given that self-employed income is already viewed as "volatile," this higher qualification bar often slashes their maximum loan amount by 20% to 25% compared to a salaried peer with the same gross revenue.
Canada vs. the US.
Let’s be clear right from the start: self-employed borrowers face additional hurdles in both countries. However, if you come from the US, you’re probably accustomed to the idea of self-employed mortgage loans, which offer more flexible options.
For instance, the US has a massive non-QM (non-qualified mortgage) market. Self-employed borrowers can use 12 to 24 months of business bank statements to prove cash flow, ignoring tax returns entirely. But there’s a catch: rates are often 1.5% to 3% higher than conventional loans.
So yes, if you have the extra cash, it may be easier to buy in the US. But if you have the patience and determination, Canada’s rules won’t deter you.
Four mistakes that can ruin your plans and how to avoid them.
There may be other pitfalls that can get in the way of owning property in Canada when you’re self-employed, but these are the four most common ones.
1. Not doing enough research.
Every industry has its own terms, and real estate (especially the financial side) is no exception. This is why it’s paramount to do your research and make sure you understand the jargon and technical terms before you start looking.
How to avoid it.
Find reliable sources that are representative of the Canadian real estate market, like REW’s Suburban Dictionary, and ask experts you trust whenever something isn’t completely clear.
2. Taking The DIY Route
Many self-employed individuals are used to tackling challenges head-on, but buying a home and securing a mortgage can be a bit too much even for the scrappiest DIYers. It can be done, but unless you have advanced knowledge of the market and financing sources, it exposes you to many pitfalls.
How to avoid it.
Talk to an experienced mortgage broker who knows the market and can provide information and guidance on both funding and the real estate market. They can also help you get your documentation in order, so your financing request will go through without a hitch.
3. The pre-qualification vs. pre-approval dilemma.
These terms are often used interchangeably by the general public, but if you want to be a homeowner, you'd better know the difference.
- Pre-qualification: You tell the bank what you make; they tell you what you might get (no background checks at all). This so-called evaluation is closer to a New Year's resolution than to getting your funding request approved, though.
- Pre-approval: The lender performs a credit check and locks in an interest rate for a determined period of time. Recently, many lenders (like BMO and TD) have extended these locks to 120 or even 150 days.
How to avoid it.
Know that getting pre-approved trumps being pre-qualified. However, be aware that, until you’re actually approved, there’s no complete guarantee you’ll get the amount you need. That’s because lenders typically don't fully verify your self-employed income until you actually find a home and submit a live application.
4. Not getting their funds in order.
Self-employed borrowers who are immigrants may want to use funds from overseas for their down payment. This is not wrong, but lenders (and the CRA/FINTRAC) are notoriously skeptical of large overseas transfers.
Things get even more “worrisome” for lenders when these funds come from a self-employed individual’s business accounts. So, if you don’t want your mortgage application to be stalled, it’s best to sort your funds in advance.
How to avoid it.
Move the money into a Canadian bank account at least 90 days before you apply. This significantly reduces the paperwork burden. Also, if the overseas funds are a gift from a relative, you will need a Gift Letter signed by the donor. Note that some lenders require the donor to provide their own bank statements to prove they actually had the money to give.
In summary.
While it’s true that self-employed borrowers have it rougher, they are not left out of getting a home or investing in real estate. If you’re interested, do your research, talk with the right experts and make sure all your papers and funds are in order.
