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Everything you need to know to qualify for a Self Employed Mortgage


Since 2012, It's become the wild west of mortgage options out there for those folks who are living the Canadian dream of being Self Employed (also known as BFS, Business for Self). In 2012, the Office of the Superintendent of Financial Institutions introduced Guideline B-20, which required federally regulated banks to tighten the rules for approving mortgages. Without boring you with what that mortgage jargon translates to you, but the bottom line means you "generally" have to qualify now from your Line 150 of your tax return. That's NET income, not GROSS income. Don't freak out yet! There is good new below...

As self employed folks, one of the perks of being self employed is we don't pay as much in taxes as we have business write offs we can use to lower our GROSS income. We are now being penalized with many lenders with higher rates and fees with these new rules.

I wish there was a simple book with straight up rules for the BFS mortgages, but there really isn't. Why?

  • It depends on your credit

  • It depends on where your income is coming from and how long. Is it commissioned, contract, invoiced, under the table or under your mattress?

  • It depends on your down payment.

  • Are you a Sole Propriotor or Incorporated?

  • It depends on so many factors...hence you really need a mortgage consultant who really understands BFS mortgage programs.

  • Did you know we can GROSS up your income by 15% in many cases?

There are a few programs you may fit under:

Stated Income, Business for Self Conventional, or Alternative or Private lender.

All of them are slightly different, but you will fit somewhere with someone!


Different Mortgage Types For Self-Employed

When it comes to mortgages as a self-employed Canadian, you may have more options than you think. It’s important to understand how each of these options works, what its pros and cons are and how it can work for your specific situation.


STATED INCOME MORTGAGES

Stated income mortgages require a large down payment (35% or more) as they operate in a much different manner than traditional mortgages. With a stated income mortgage, your lender doesn’t verify your income, and instead, asks that you declare or state your income. You won’t be required to provide any documents to prove this income, you’re just asked to ensure your stated income is reasonable based on your business and industry.

Depending on which lender you’re approaching, different rules may apply.


Insured Stated Income Mortgages

If you don’t have the cash to make the large down payment required for a stated income mortgage, you’ll need to pay insurance premiums as the lender is taking a big risk with this loan. If you opt for an insured stated income mortgage, you can make a down payment of as little as 10%, but you’ll need to have a good credit score. You’ll need to opt for a private mortgage default insurer, as CMHC doesn’t insure stated income mortgages.


SAGEN – BUSINESS FOR SELF (ALT. A) INSURER PROGRAM

Formally known as Genworth Canada, Sagen’s program allows self-employed Canadians to get a mortgage without income verification. Keep in mind you’ll still need to verify the history and operation of your business and prove it’s been operating for a least 2 years. If you can show 1 year filed and one year in same industry then we can get exceptions on this 2 year rule.


The program is only available for owner-occupied properties so you can have owner-occupied rental properties up to two units with one being occupied by the owner. It doesn’t apply for vacation rentals, other rental properties and second homes.


If you have a previous bankruptcy or work as a self-employed commission salesperson, you don’t qualify for this program.


MINIMUM DOWN PAYMENT

When it comes to the “A” lenders, minimum down payments can range from 5% with default insurance up to 30% with no default insurance. If you’re opting for a stated income mortgage, you can expect your down payment requirement to be much higher (35%) as your loan is a lot riskier to the lender. Before you figure out how much to save for a down payment, do your homework to choose which mortgage option is best suited for you. This way you can ask all the necessary questions in advance and get some insight into what your options will be, which will help you determine how much money you’ll need to save for a down payment.


Income Documents usually required for Self Employed Mortgages are:

  1. Full application - I can't understand your file without it. Without a full picuture of your file, I can't quote rate, terms, or even an idea. Do you need to send your documents and application or we are wasting each others time.

You an expect that these documents will be requested to assess your situation.


Are you Sole Propriotor?

  1. 3 years T1 Generals FULL showing your Statement of Business Activities

  2. 6 months - 12 months bank statements showing deposit of funds / with invoices.

  3. Business License

  4. Personal Canada Revenue Notice of Assessment.

Are you Incorporated?

  1. 3 years T2 Corporate tax returns.

  2. 6 months - 12 months bank statements showing deposit of funds / with invoices.

  3. Business License

  4. Articles of Incorporation - showing shareholders if there is more than you.

  5. 2 year recent Corporate Tax returns. To see the health of your Retained earnings

  6. Personal Canada Revenue Notice of Assessment.


Common Questions I get:

Q: I was working with a company as a computer systems analyst for the past 3 years. Now I am self employed as a computer systems analyst. Can I still qualify for a mortgage with less than 2 years as filed self employed?

A: Yes, as long as you are in the same Job role, you should have no issues

Q: I heard you need 20% down to qualify for Self Employed Mortgage.

A: There are a few lenders that allow for 5-10% down payment now even with 1 year filed as Self Employed

Q: I am a waitress and make most of my money in tips. How can I use this to qualify for a mortgage.

A: If you're not declaring your tips on your taxes, then some lenders will look at 6-12 months deposits into you account.

Q: Can I refinance to pay off my Canada Revenue Debt I owe:

A: Yes, very common practice when refinancing. Can't do it with purchases! Must not owe CRA any money when you apply for mortgage.

Self Employed mortgage tips:

  1. Keep your business money deposited in one account. Separate your expenses and your income accounts.

  2. Leases or Loans on vehicles for business should come out of your BUSINESS account or they will be added as a liability and could sink your approval.

  3. If your company is paying you a "stipend" or "allowance" for you vehicle, make sure it's taxable income. You will need two years to use this as income.

  4. Make sure your invoices match your deposits.

  5. When depositing "other monies" ie: tips, tag it on your deposit slip so it shows up online with your deposit.

  6. Keep important documents such as articles of incorporation, GST/HST registration or business licence in one folder with all your tax returns. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction. Be organized.

  7. If you're not filing business financials, file T2's if you are incorporated. Filing business financials may be more expensive, but worth it for mortgage qualifying with more lenders.

  8. If you pay yourself dividend income, you will need two years of this form of income.

If your in business for yourself, congratulations! Keep up the good work. There are many moving parts to planning and qualifying for a self employed mortgage, so if you're just starting to look at the idea of a mortgage - plan NOW!

I too am self employed and work with many Professionals such as Lawyers, Doctors, Pharmacists, Management Consultants and self employed folks such as truck drivers and waitresses.


You're all important and have different incomes we can use to make your dream come true.


Reference sources you can read on:

Kiki Berg, Professional Mortgage Strategist

778-808-7756

kiki@bluebutterflymortgages.ca

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