To apply for a self-employed mortgage at a bank, you need to have been operating your business for at least 2-3 years. The documentation you may need to provide in your mortgage application include:
Documentation differs depending on your bank; check with your bank for their requirements.
You can also apply for a self-employed mortgage with a credit union, mortgage finance company, or a private lender.
There are unique challenges in obtaining a self-employed mortgage from a traditional lender such as a bank or credit union. Traditional lenders use your net income from line 150 of your T1 tax return from the past 2 or 3 years to determine the mortgage you qualify for while many private lenders offering a Stated Income Mortgage will use your gross income. Your net income is calculated as your gross income less any business expenses that you may have deducted. For instance, you may have deducted business expenses such as legal expenses, business travel, business meals, or office supplies expenses from your gross income to get to your net income.
Having a lower net income allows you to save on income tax, but the disadvantage of having a low net income is that it may be harder for you to qualify for a self-employed mortgage from a traditional lender.
You can find the best mortgage rates by contacting a mortgage broker who will find the best rates for you based on your financial situation or through WOWA’s ranking of the Best Mortgage Rates in Canada
A self-employed individual is defined as someone who works for themselves through securing contracts and servicing clients. A self-employed person does not work for an employer and does not earn a fixed salary or wage.
Traditional lenders include A Lenders and B Lenders such as banks and credit unions. A Lenders include the largest banks in Canada, such as RBC, CIBC, BMO, TD, Scotiabank, and National Bank. Examples of B Lenders include Equitable Bank and Home Capital and mortgage finance companies such as MCAP and MERIX Financial. Some private lenders offer a “Stated Income Mortgage” to self-employed individuals.
The A lenders include the six largest banks in Canada. The A lenders generally have the most stringent lending criteria, which requires you to pass a mortgage stress test , and show you have a good credit history and a stable income.
A credit score is a numerical value assigned to each individual based on their history of repayments. It helps creditors predict how likely you are to repay your debts in the future. The credit scores range from 300-900 and a credit score above 660 is generally considered good, while a credit score above 725 is considered very good.
Several banks have specific mortgage products for self-employed individuals, and these include National Bank Mortgage for the Self-Employed, RBC Self Employed Mortgage, and Scotia Mortgage for Self Employed. Meanwhile, BMO, CIBC, and TD do not have a specific mortgage application for self-employed individuals but will consider all mortgage applications regardless of your employment type.
A lenders offer fixed and variable rate mortgages. Documentation that is required includes your Notice of Assessment for 2-3 years prior to your application, financial statements, and articles of incorporation if you are incorporated.
Different banks have different minimum down payment and maximum loan requirements. The mortgage down payment is what you are required to pay upfront to obtain a mortgage and you can check your mortgage down payment. The Home Buyers’ Plan may also allow you to withdraw up to $35,000 from your RRSP if you are a first time home buyer.
|Mortgage Loan Amount||Maximum of $600,000||Up to 80% with no default insurance or up to 95% with default insurance (if your NOA shows sufficient income) Up to 65% with no default insurance or up to 90% with default insurance (if your NOA does not show sufficient income and you need to withdraw funds from your business)||Up to 65% without default insurance -Maximum of 90%||Up to 80% with no default insurance or up to 95% with default insurance||Up to 80% with no default insurance or up to 95% with default insurance||Up to 80% with no default insurance or up to 95% with default insurance|
|Minimum Down Payment||10%||20% with no default insurance or 5% with default insurance||10% (Must have default insurance if loan to value ratio exceeds 65%)||20% with no default insurance or 5% with default insurance||20% with no default insurance or 5% with default insurance||20% with no default insurance or 5% with default insurance|
|Documentation and Other Requirements||-Must have operated your business for at least 2 years -Proof of sound financial management||-Notice of Assessment -Confirmation of self-employed status||-Gross Debt Service Ratio cannot exceed 32% of family gross monthly income -Total Debt Service Ratio cannot exceed 40% of family gross income -Proof of monthly income and monthly expenses -Monthly payments on outstanding debts||-Must have operated your business for at least 3 years -Proof of monthly income and monthly expenses||-2 to 3 years of financial statements -Articles of Incorporation -A list of current assets and liabilities||-Notice of Assessment from the last 2 years -Value of assets and any outstanding debt -Credit score|
The Gross Debt Serviceratio is the percentage of your monthly income required to pay your monthly housing costs while the Total Debt Service ratio is the percentage of your monthly income required to pay all your monthly living expenses (including housing and non-housing expenses).
In 2020, only approximately 60% of mortgages for new home purchases were approved by A Lenders. Self-employed mortgage applicants may have an unstable income or a less than sufficient credit rating to qualify for a mortgage with an A lender. In this case, you may be looking towards obtaining a loan from a B Lender. B Lenders include creditors such as Equitable Bank, Home Capital, MCAP, Merix Financial, and Street Capital Financial Corporation.
B Lenders typically have less stringent requirements than A Lenders because banks and credit unions are subject to more regulation. The regulated mortgage market in Canada is overseen by the Office of the Superintendent of Financial Institutions (OSFI). As a simple comparison, MCAP has a Gross Debt Service ratio of 39% (compared to 32% at Scotiabank) and a Total Debt Service ratio of 44% (compared to 40% at Scotiabank). The higher the ratio, the less income you are required to have compared to your housing costs and living expenses, and this makes it easier to qualify for a mortgage.
To apply for a mortgage with a B Lender, you are typically required to go through a mortgage broker. A mortgage broker is a professional who is specialized in finding mortgages based on your unique financial situation. Your mortgage broker will let you know what documentation you are required to provide.
As B Lenders typically lend out riskier mortgages, the rates are also generally higher than those offered at A Lenders. For example, a 5-year fixed-rate mortgage at Equitable Bank is 4.79% while a 5-year fixed-rate mortgage at Merix Financial is 2.19%. However, if your mortgage is insured by mortgage default insurance, you may be able to secure a lower rate as the insurance renders your mortgage riskless to the lender.
Private lenders should be used as a mortgage lender of last resort as their interest rates are generally very high -- around 7-18%. Also, private mortgage fees including broker fees and fees for setting up the loan can amount to 1-3% of your property value. As private lenders are part of the unregulated mortgage market, their approval process is much easier and less stringent than those of the abovementioned lenders. Private lenders will consider the value of your property as well as your creditworthiness. Private lenders offering a Stated Income Mortgage will use your gross income to calculate the amount of mortgage you qualify for. Private lenders include individual lenders and syndicate (group) investors.
The Canadian Mortgage and Housing Corporation (CMHC) provides insurance to self-employed mortgage lenders should the borrower default on their mortgage. In Canada, the OSFI requires you to purchase mortgage default insurance if your down payment is below 20%, however, some banks might require you to have insurance for down payments up to 35%. The higher your down payment, the lower your insurance costs.
Self-employed individuals have the same insurance premiums and qualification criteria as employed workers. These are:
The loan-to-value ratio is the amount of mortgage that makes up the total purchase price of your property.
Mortgage Insurance Premiums:
|Loan-to-Value||Premium on Total Loan (%)|
|Up to and including 65%||0.60|
|65.01% - 75%||1.70|
|75.01% - 80%||2.40|
|80.01% - 85%||2.80|
|85.01% - 90%||3.10|
|90.01% - 95%||4.00|
To calculate how much you will be paying in mortgage default insurance, use the CMHC Mortgage Insurance Calculator . The CMHC self-employed policy covers different business organizations forms including proprietorships, partnerships, and incorporated companies.
To apply for the CMHC self-employed mortgage insurance, you are required to provide documentation supporting the length of your business operation and income. These include, but are not limited to, your business income tax returns, credit reports, GST returns and audited financial statements. For proof of income, you are required to provide your Statement of Business (T2125), personal tax return (T1), Notice of Assessment, and Proof of Income.
Genworth Mortgage Insurance is a private corporation that also offers mortgage default insurance. Their lending guidelines are similar to those of CMHC and their insurance premiums are the same as CMHC. Genworth Mortgage Insurance provides self-employed business owners insurance for mortgage amounts up to a 90% Loan-to-Value ratio. The policy is available to Sole Proprietors, Partnerships, and Corporations. Borrowers must provide 2 years of annual and business income. Genworth is owned by China Oceanwide Holdings Group Co. Ltd.