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How to Qualify for a Mortgage as a Self-Employed or Small Business Owner

Navigating the world of mortgage approval without a pay-stub
By Catherine Musgrove Feb 12, 2020

In 2018, there were 2.9 million self-employed Canadians, accounting for 15 per cent of the total workforce. In 2017, Small business owners in Canada accounted for 97.9 per cent of entire employer businesses or 1.15 million.  Those numbers continue to rise. Self-employed and small business owners can deduct certain business expenses; they can keep more of what they earn. Pretty attractive gig, would you think?

Unfortunately, the fortune runs dry when applying for a mortgage. If small businesses are thriving, making an income, having a bright future, why is it so difficult for lenders to hand over a mortgage loan?

"Those who are self-employed or own a small business have the opportunity to claim or write off many business expenses against their income. So their taxable income looks much less on paper, reducing the amount of taxes they pay," says Mary Major Allen. Mary is a Mortgage Broker with The Mortgage Group in Halifax.

By lowering their taxable income by maximizing business expenses and personal deductions, they may be limiting their mortgage potential. There is a discrepancy between what's on their tax return and how much money they earn.

What Do You Need When Applying For A Mortgage

The earlier in the home buying process as possible, consult a Mortgage Broker or Specialist. Knowing what you will need to produce upfront will decrease the feeling of frustration and disappointment down the road. For an in-depth look at the different stages of the mortgage approval process, you may want to check our previous blog.

Homebuyers are required to contribute a 10 per cent down payment on the portion of the price of a home above $500,000, plus 5 per cent on the amount up to that amount. The average small business owner's salary in 2019 was $66,373, according to PayScale data. Eighty-three per cent of small business owners take an annual salary of less than $100,000, and 30 per cent report they take no pay at all. With this in mind, it is crucial not to overextend yourself – so you have adequate income to qualify for a mortgage and also to ensure you have money to reinvest in your business.

"You will have to show two to three years' notice of assessments for reliable proof of income," says David McDill, Mortgage Consultant with Mortgage Insight: The Mortgage Centre in Cobble Hill on Vancouver Island.

If you are new to the self-employed scene or just opened your business, you will have to produce other evidence of income.

You may want to consider completing a statement of income. A Stated Income or grossing up your income to qualify for a mortgage is an option with some lenders. You should be able to show the extra income you are claiming to make in retained earnings in the company or your investments.

If you are taking the Stated Income route, remember to stay reasonable in your declaration of income. Your lender will look at an average salary for someone of similar experience and occupation.

"So, for example, as a plumber, you say you make $100,000, but the average self-employed plumber only makes $75,000, the lender is going to want to know why there is such a discrepancy," says McDill.  You also cannot be stating your income higher than the gross business income.

McDill says there are three mortgage insurance companies to consider: Canada Mortgage and Housing Corporation, Canada Guaranty, and Genworth Canada. Genworth is the only one currently taking Stated Income as an option as an unverified income.

And remember, being self-employed can mean tax savings, which should be taken into account when offered a higher rate. It is often more advantageous in the long run to accept a higher rate mortgage than paying additional income tax.

Be Pro-Active

The bottom line: Best rates are for those who are income-qualified and are reporting their income.  To ensure the best possible success, and possibly the best interest rate, make sure you have your ducks in a row when meeting with your mortgage professional. Here are things you should put on your must-have list:

  • Accountant-prepared business financial statements for the last two years (particularly crucial if you are incorporated)
  • Business license documentation
  • Accountant-prepared personal T1 general tax returns
  • Most recent and possibly the previous three years' Notice of Assessment and proof that taxes are up-to-date. Owing taxes can do more damage than anything else. If you owe, pay off immediately.
  • Corporate bank statements illustrating current cashflow. These statements are not necessary, but it is a great document to have handy.  
  • Bank statements showing regular income for the past six months or longer.
  • Be ready to discuss your business. Things like income, business expenses, and specific milestones will be among the topics addressed.

Are You a Sole Proprietor or Are You Incorporated?

Depending on your credit, and the way your business is registered, some lenders may add between 15 and 20 per cent to your total income as a way of "adding back some expenses." If you are incorporated and have verifiable income, some financial institutions can gross-up your income by as much as 15 per cent. If you are issuing a T4 to yourself as an employee of your company, the lender will use whatever salary you are reporting.

"If you are a proprietor, many lenders will look at your statement of business activities and things you may have written off, such as the depreciation on a work vehicle," says McDill. "Those things may be added back in as income or at least taken into consideration and averaged out in terms of your previous income."

These tips are not exhaustive of everything your lender might ask from you.

"Lenders usually take each case individually. They do not want to find a reason to turn you down. They want things to work out if it makes sense," says McDill. Take your time to prepare your materials, save for your down payment, and consult a mortgage broker or banker as early in the process as possible, and you will find yourself in your dream home before you know it.

Other articles of interest:

Catherine Musgrove
Catherine Musgrove is a journalist with 25 years of experience in writing, editing, and photojournalism. She has written for a wide range of newspapers, magazines, websites, and other media. Catherine has a keen interest in the national real estate market and home industry, having written extensively for home and related publications across the country. She currently resides in Ottawa and has lived from coast to coast.
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