TL;DR: if you have been self-employed for less than 2 full years, or have changed your business structure (by incorporating, for example) and have been under that structure for less than 2 years, options are available with 10% or more down payment. If you have been self-employed and operating under the same structure (i.e. as a sole proprietor, or as a corporation, etc) for 2 full years you will have access to best rates and terms.
3 minute read
As the number of Canadians who are self-employed grows, the challenge of obtaining a mortgage for these home buyers becomes more evident. One of the key issues is proving income, which is often trickier. Business owners usually try to minimize the taxes they pay by claiming as many expenses as possible. For lenders, this can make them appear to have a much lower income. However, it is still possible to get a mortgage with best rates and features if you are self-employed.
Proven income for at least 2 full years
To prove income, you will need to have been in business for at least 2 years, and under the same corporate/business structure. That second part is important - under the same structure. It is common, for example, for a business operating as a sole proprietorship to incorporate, or to enter into a partnership. After a change in structure, generally it is best to have two full tax years completed and tax returns in hand under any given structure. If you just incorporated in mid-2016, then 2017 and 2018 will be the first two full tax years, and would likely be the best years to use to validate and prove income
Less than 2 years in business or under new structure, or deductions are a significant amount of income
If income is not provable - such as in cases where the deductions taken are a significant portion of the total income - or where the business or its current corporate structure are less than 2 years old, other options are available. The other programs, referred to as stated income programs, allow for more generous evaluation of the deductions and the option to add back certain amounts of certain deductions to the net income amount, which increases the borrowers income being used to qualify. This in turn increases maximum affordability. There are more hoops to jump through and paperwork to provide, but it means that a property can be purchased with as little as 10% down payment.
Default insurance for self-employed borrowers
For home buyers who have good income documentation, the rules about mortgage default insurance will be the same as with traditional buyers. The default insurance premium rates, and when they apply or do not apply, are the same.
If income is more difficult to prove and a statement income program must be used, or you don’t have sufficient income documents, the minimum down payment necessary increases to 10% and the default insurance premium rate increases as well.
Documents that will be needed
In either scenario, the documents that are needed generally include:
- 2 years of financial statements for the business
- 2 years of personal tax information for you
- Proof of future revenue such as contracts are helpful
- Proof you are the owner of the business (corporate search)