Whether you call it your gig, side-hustle or passion project, the number of people in Canada who are self-employed is on the rise. When you're focused on building your business, home ownership can seem like a challenge. While it's true that qualifying for a mortgage when you're self-employed is different from a regular employee, our team is here to walk you through the options with mortgage lenders and insurers.
A sole proprietor is a person who runs a business on their own. That business is not limited or incorporated, has only one owner, and could have zero to several employees other than the proprietor. All of the net income of the business is taxable income for you as the sole proprietor, although you may choose to pay yourself through the business payroll system to take a steady wage, or draw income through the year based on cash flow and then calculate your total income at the end of the year. This is a very common form of business ownership, particularly in Victoria and across Vancouver Island.
Qualifying for a Standard Mortgage
To qualify for a mortgage as a self-employed sole proprietor, you would need to earn enough income as reported on line 15000 (formerly 150) of your tax return to service all your debt along with the mortgage, heat and property taxes for the property you want to buy or refinance.
When applying for a mortgage, you will need to provide:
- proof you have been in business for a minimum of 2 years;
- 2 years’ full income tax returns (T1 general + applicable schedules);
- your most recent notice of assessment from the Canada Revenue Agency.
Once we have these documents, our mortgage specialists can use a 2-year average income and add 15% to account for the assumption that you would have written off a certain amount of expenses that would have otherwise been paid to you in wages. This average + 15% becomes the qualifying income for your mortgage application.
The Alt-A Program
What if your 2-year average income doesn’t allow you to qualify? Our team still has access to an insured product called the Business for Self or Alt-A program. This program comes with a fee of anywhere from 1.50% to 5.85% added to the mortgage and based on the loan-to-value ratio, which is how much you are borrowing compared to the value of your home. This fee is paid to the mortgage insurer to protect the bank should you default.
From the insurer is the following explanation of the Alt-A program:
“This program is designed for self-employed borrowers who are unable to provide traditional income verification but have a proven 2-year history of managing their credit and finances responsibly. Eligible borrowers typically own a small size business for a minimum of two years, which can be confirmed via a third-party arm’s length document. In addition, the borrower is required to declare their annual income and annual business revenue, which should be reasonable based on the industry, length of operation and type of business.”
While the program may seem simple on the surface, there are many criteria that are examined by both the insurer and the lender before approving the mortgage. The most important distinction for this solution is whether the file qualifies based on the income from your T1 General forms. If your income can be verified using this alternative to the 2-year average, then we can move ahead with this program.
Qualifying with Stated Income
If the file does not qualify based on the income from your T1 General forms, we move to a stated income solution. In this situation, the lender and insurer will allow you to state an income that is different than what you claim when you file your taxes. However, the process may not always make sense. For example, a home care worker with an annual net income of $30,000 may not be able to state $50,000 but a furniture maker who nets $30,000 on their T1 General may be able to state $50,000.
Factors to consider in stating income include:
- How much gross income was on your T1 General?
- Do you have employees?
- Is there a cash component to your business?
- What kind and how much in expenses do you write off in a year?
The stated income product, like most mortgage lending products today, has many nuances that can be complicated to navigate on your own. Working with a mortgage specialist long before you require this product is highly important to ensure that you will qualify when you renew or refinance your existing mortgage or put in the offer to purchase your new home.
Get Your Mortgage Pre-Approval
If you are self-employed and think you may buy a property or refinance your home in the next couple of years, now is the time to start working with a mortgage specialist. Based on your free consultation with our team, we will work with you to get the best mortgage solution and meet your financial goals. Book a time to meet with us that works for you. You can also give us a call at 250-590-6520 (toll-free 1-855-590-6520) to arrange an appointment.
This article is written from the perspective of a mortgage professional and the rules that we must follow when qualifying self-employed/business for self individuals.
Originally posted September 2016; updated October 2020.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.