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BUYING
Getting a mortgage when you’re self-employed can seem overwhelming at first. It’s not a traditional path that you’ll follow, but with a good mortgage broker and the right plan, it can be as easy as it gets.
It’s hard to know exactly how many Canadians are self-employed because more and more of us are every time you check. At the end of 2018, over 3 million Canadians were self-employed—nearly 15% of the labour force—according to Statistics Canada.
For the purposes of getting a mortgage, the term “self-employed” simply means you’re not on a typical employee payroll, with CPP/EI and income tax deducted from your pay every 2 weeks. You might own your own corporation and pay yourself a salary, but your salary is derived from your corporation generating enough income to pay you.
Yes, getting a mortgage when you’re self-employed can be challenging, but it’s possible – don’t think you don’t have options.
We’ve put together some tips based on current clients who are self-employed and working with one of our mortgage brokers who specializes in self-employed buyers.
If you have good credit, have manage your debt well and have at least a 12-month history of credit, you may be able to qualify for a mortgage based on how much you actually earn. Have you paid yourself and declared enough income for the past two years, and filed your taxes accordingly? This is the key to getting a Prime Mortgage, or A-Lender mortgage – also, you don’t owe the CRA any money and are up to date on all payments.
Lenders will look at the income stated on Line 150 of your tax return. They don’t only look at the fact that you grossed $200,000 per year but wrote it down to $50,000 for “tax reasons”. If you paid yourself $50,000, the lender assumes your income is $50,000 and you can afford a home that a $50,000 income could carry.
If you have enough line 150 income for the past two years, then you qualify for about five times your Line 150 income. Lenders will average your income over a 2-year period and will be looking for your income to be steady or increasing over the 2 years.
So that $50,000 income in the example above, will help you qualify for approximately $250,000 in mortgage financing.
But what if you’re newly self-employed and want to buy a house? Are you out of luck for two years? The short answer is no.
CMHC recently announced a new lending program for borrowers who are self-employed for 2 years or less. Normally, a lender needs to see a 2-year self-employed period to qualify you. CMHC, however, is filling a gap in the market. If you had worked as a full-time employee for several years but have recently decided to incorporate and do contract work, your tax return may show a lower income than what you actually make. With the new CMHC program, you are able to extrapolate what you could make based on contracts and bank statements and not Government of Canada tax returns to help you qualify with as little as 5% down.
This program is only available to purchases under $999,999 and maximum of 25-year amortizations with great credit.
A Stated Income mortgage is useful when you make a good gross income but have expenses that bring your income below what you need to qualify, using the 5x rule.
With a Stated Income mortgage, lenders take a number between your gross and net incomes (line 236 and line 150), and formulate an Income Reasonability number to qualify you.
Some rules of thumb for stated income mortgages:
Working with an Alternative Lender, or what is known as a B-Lender, is an option If you have bad credit and are self-employed and/or if you do not have enough income to qualify the traditional way or via stated income. But there are some things to note when going down this route that may contribute to incremental costs that are only realized here:
This type of solution is good in the short-term, as the contracts are usually fixed for 1-3 years. Hopefully during this period, you’ll be able to sort out your finances and credit, and then move on to a more traditional mortgage.
Sometimes, credit union financing is the best option for you if you’re self-employed. Think of credit unions as in-between the prime lenders (show me the income) and the alternative lenders (we don’t need to see any tax paperwork). Credit unions will want to see:
Private mortgages should be your absolute last option, after you’ve exhausted the alternatives above. These should be used in times of emergency. The main goal of a private lender is to make money. They don’t care about your income, taxes and if you owe any money. They will charge you an incredible amount of money to lend, but they will be able to close quickly in case of said emergency.
Our best pieces of advice to anyone who is self-employed and looking to purchase a house or condo is to speak with a mortgage broker. We’ve got a great roster of brokers who specialize in self-employed individuals and know the ins and outs of all kinds of lenders.
If you’re looking for a referral, simply fill out the form below so we can connect you with our specialists.
