Self-Employed? How to Get a Mortgage in Canada

Working for yourself shouldn't stop you from owning a home, but it does change how lenders look at your income. Here is what lenders ask self-employed buyers for, how they count your income, the mortgage insurers' programs for business owners, and how to get ready before you apply.

The short version

What lenders ask for

Federal guidelines ask banks and other federally regulated lenders to verify a self-employed borrower's income with documents from an independent source. Your lender will tell you exactly what it needs, but the list usually includes:

• Notices of Assessment from CRA for the past two years
• T1 Generals, with your statement of business activities
• Proof of your business and how long it has run, such as a business licence, articles of incorporation, GST/HST returns, business bank statements or financial statements
• Proof that you have no unpaid tax. Sagen and Canada Guaranty require no tax arrears, and lenders check your most recent Notice of Assessment for it.

How your income is counted

Lenders generally look at your total income on line 15000 of your tax return, which is after your business expenses. The business expenses you deduct also lower the income a lender sees, so it is worth talking to your accountant about the trade-off a couple of years before you plan to buy.

• Sole proprietors and partners. Under CMHC's program for the self-employed, your income can be grossed up by 15%, or the lender can add back business-use-of-home, motor vehicle and capital cost allowance deductions. On $80,000 of reported income, a 15% gross-up means the lender works with $92,000.
• Incorporated owners. The salary your corporation pays you shows on a T4, and lenders may also ask for the company's articles of incorporation and corporate tax returns.

Mortgage insurance programs for business owners

With less than 20% down, your mortgage has to be insured, and the home has to cost less than $1.5 million. Each insurer has its own program:

• CMHC Self-Employed. For sole proprietors, partners and incorporated owners who can document their income. CMHC recommends at least 24 months running the business or working in the same line of work, with flexible options for the recently self-employed. At least one borrower or guarantor needs a credit score of 600 or more. You can put down the usual minimum, starting at 5%, and the premiums are the same as for any insured buyer.
• Sagen Business for Self. For owners who can't provide traditional proof of income. You need at least two years in business, and your stated income has to be reasonable for the length of operation, type and size of the business. The maximum loan is 90% of the price, so you need at least 10% down, and at least 5% has to come from your own savings.
• Canada Guaranty Low Doc Advantage. Also for owners with at least two years in business and a strong credit profile. You need at least 10% down, with at least 5% from your own resources, and commission sales income and second homes aren't eligible.

The trade-off is cost. At 10% down, Sagen's and Canada Guaranty's premium is 5.85% of the loan, compared with CMHC's standard 3.10%. On an $800,000 home with 10% down and a 25-year amortization, the $720,000 mortgage carries a premium of $42,120 instead of $22,320.

The stress test still applies

Insured or not, you have to qualify at the greater of your contract rate plus 2% or 5.25%. For insured mortgages, your housing costs can't be more than 39% of your income, and all your debts together no more than 44%. I explain these ratios in How Much House Can You Afford?

If you don't fit the insured programs

With 20% or more down, your mortgage doesn't need insurance, and lenders set their own rules for documenting income, although banks still follow federal guidelines. The Financial Consumer Agency of Canada lists being self-employed, your credit history and the type of lender you choose among the things that can affect your rate, so compare offers carefully. A mortgage broker can shop several lenders for you. Brokers are usually paid by the lender, and you can look up a broker on the BC Financial Services Authority's website.

How to get ready

• File on time. Self-employed people have until June 15 to file, but any balance owing is due April 30.
• Pay what you owe CRA. Tax arrears can stop an insured application.
• Keep your records. CRA generally requires businesses to keep records for at least six years, and tidy statements make a lender's job easier.
• Check your credit report for errors before you apply.
• Get pre-approved early, so you know which documents your lender wants and roughly how much it may lend.

Questions self-employed buyers often ask me

How long do I need to be self-employed to get a mortgage?

Most programs look for two years. CMHC recommends 24 months in the business or in the same line of work, and has flexible options for the recently self-employed.

What documents do self-employed borrowers need?

Usually your Notices of Assessment and T1 Generals for the past two years, proof of your business such as a licence or GST/HST returns, and proof that you owe nothing to CRA.

Can I buy with 5% down if I'm self-employed?

Yes, if you can document your income. On a home under $1.5 million, CMHC's self-employed program follows the usual minimum: 5% of the first $500,000 and 10% of the rest. Programs based on stated income need at least 10% down.

Do lenders use my gross or net income?

Usually the income on your tax return after expenses. Some programs adjust it, such as CMHC's 15% gross-up for sole proprietors or adding back certain deductions.

Does the stress test apply to self-employed buyers?

Yes. You qualify at the greater of your contract rate plus 2% or 5.25%, the same as any other buyer.

Planning your purchase? Start with a mortgage pre-approval, try my mortgage calculator, and compare fixed and variable rates.

This article is general information, not financial or tax advice, and your lender and insurer make the final decision. For the federal guide, see getting pre-approved for a mortgage.