Begin with educating yourself on the process and navigating challenges

As a self-employed individual in Canada, navigating the mortgage process can present unique challenges. From proving income to determining borrowing limits, there are several factors to consider when seeking a mortgage. In this comprehensive guide, we will cover everything you need to know about securing a mortgage when you are self-employed in Canada.

What is a Self-Employed Mortgage?

A self-employed mortgage is a type of home loan designed for individuals who run their own businesses or work as freelancers, contractors, or consultants. Unlike traditional mortgage applicants who may have stable, verifiable income from employment, self-employed individuals often have variable income streams and may face additional hurdles when applying for a mortgage.

Qualifying For a Mortgage When Self-Employed

Qualifying for a mortgage as a self-employed individual in Canada requires thorough documentation and proof of income. Here are some key factors lenders consider:

• Income Verification:
Lenders typically require two to three years of tax returns to verify income for self-employed applicants. This includes Notice of Assessments (NOAs) from the Canada Revenue Agency (CRA) to confirm income consistency and stability
• Business Financials:
Lenders may request additional documentation such as financial statements, business bank statements, and business credit reports to assess the financial health of the applicant’s business.
• Credit History:
A strong credit history is essential for mortgage approval. Self-employed individuals should ensure their personal credit score is in good standing and be prepared to explain any discrepancies or issues.
• Debt-to-Income Ratio:
Lenders evaluate the applicant’s debt-to-income ratio to determine their ability to manage mortgage payments alongside existing debts. Keeping debts low and income high can improve mortgage eligibility.

How much can I borrow for a self-employed mortgage?

The amount you can borrow for a self-employed mortgage in Canada depends on several factors, including:

Income Stability:

Lenders prefer to see consistent income over multiple years when assessing mortgage affordability. Higher and more stable income increases the likelihood of approval and may allow for a larger loan amount.

Debt-to-Income Ratio:

Lenders consider the applicant’s debt-to-income ratio when determining borrowing limits. Lower debt levels relative to income can result in higher borrowing capacity.

Down Payment:

The size of the down payment can impact borrowing limits. A larger down payment reduces the loan-to-value (LTV) ratio, potentially allowing for a higher mortgage amount.

Credit History:

A strong credit history demonstrates financial responsibility and may result in more favorable loan terms and higher borrowing limits.

Self-Employed Mortgage Default Insurance Rates

Self-employed individuals often need to pay mortgage default insurance premiums, which protect lenders in case of borrower default. The premiums for self-employed borrowers may be higher compared to traditional employees, as they are perceived to have a higher risk profile due to variable income.

1. Mortgage Default Insurance Rates with Proof of Income:
For self-employed individuals who can provide proof of income, mortgage default insurance rates are typically like those for traditional employees. These rates are based on factors such as the size of the down payment and the loan-to-value ratio. Providing proof of income can help self-employed borrowers qualify for standard mortgage default insurance rates
2. Mortgage Default Insurance Rates Without Proof of Income:
For self-employed individuals who cannot provide proof of income, mortgage default insurance rates may be higher compared to those for traditional employees. This is because lenders perceive self-employed borrowers without proof of income as higher risk. In some cases, self-employed borrowers without proof of income may be required to make a larger down payment or may face additional documentation requirements to mitigate risk.

Types of Self-Employed Income Verification

Self-employed individuals often need to pay mortgage default insurance premiums, which protect lenders in case of borrower default. The premiums for self-employed borrowers may be higher compared to traditional employees, as they are perceived to have a higher risk profile due to variable income.

• Stated Income:
Some lenders accept stated income, where borrowers provide a self-declared income statement. However, this method may result in higher interest rates or require a larger down payment to mitigate risk.
• Bank Statements:
Lenders may request several months of bank statements to verify income deposits and assess cash flow stability. This method provides a more accurate picture of income but may require additional documentation.
• Tax Returns:
Most lenders require self-employed individuals to provide two to three years of tax returns, including Notice of Assessments (NOAs) from the Canada Revenue Agency (CRA). These documents verify income consistency and stability over time.

Required Documents for a Self-Employed Mortgage

• Proof of Income: This includes tax returns, NOAs, financial statements, and bank statements to verify income.
• Business Documentation: Lenders may request business registration documents, business bank statements, and financial statements to assess the health of the business.
• Credit History: Self-employed borrowers should provide a credit report to demonstrate their creditworthiness and financial responsibility.
• Down Payment Verification: Lenders may require documentation to verify the source of the down payment, such as bank statements or a gift letter if the down payment is gifted.

Self-Employed Mortgage Lenders

While some traditional lenders may be hesitant to work with self-employed individuals, there are lenders in Canada who specialize in providing mortgages to this demographic. These lenders understand the unique financial situations of self-employed borrowers and offer tailored mortgage solutions to meet their needs. Working with a lender who specializes in self-employed mortgages can increase your chances of approval and ensure a smoother mortgage process.

What is a Stated Income Mortgage?

A stated income mortgage, also known as a no-doc or low-doc mortgage, is a type of mortgage where the borrower does not need to provide traditional income documentation such as pay stubs or tax returns. Instead, borrowers simply state their income on the mortgage application, and the lender verifies this information through other means, such as bank statements or business financials. Stated income mortgages can be beneficial for self-employed individuals who may have difficulty providing traditional income documentation.

In conclusion, securing a mortgage as a self-employed individual in Canada requires careful planning, documentation, and financial preparation. At HM Mortgages, we specialize in helping self-employed individuals navigate the mortgage process with confidence. Contact us today to learn more about our tailored mortgage solutions designed to meet the unique needs of self-employed borrowers.