How To Qualify For A Mortgage If You’re Self Employed

Do you own your own business or are self-employed? There are many perks when it comes to being your own boss, but as you may have already discovered, there is one drawback – trying to get pre-approved for a mortgage.

With 15% of Canadians choosing to go the self-employed or entrepreneurial route, this is a growing dilemma that many home buyers face. Luckily, there are ways to tackle this challenge – and in this blog post, we’ve invited Colby Sawatzky, Mortgage & Finance Manager at First Avenue Financial to share some of the options he’s used to help self-employed homeowners qualify for a mortgage.

Below, Colby and Ali (Trico’s Area Sales Manager in Cornerbrook), answer some commonly asked questions about mortgage pre-approvals and how you can get the most home for your dollar when you build with Trico Homes.

1) If I’m self-employed, what documents do I need to provide to prove my income?

Colby: Banks and lenders will typically look at your average income from the past two years, and you’ll need to provide your personal tax returns and company financials from that time period.

Due to the economic conditions from the pandemic, many banks and lenders are also now asking to see your business and personal bank statements from the past six months to verify that you are still working. They may also ask to see copies of invoices to back up the income that’s going into your account.

2) I’ve proved my income, but why are lenders still declining my mortgage application?

Colby: There can be a number of reasons for this, but here are some common ones:

In many cases, self-employed individuals will carry their business loans and debt onto their personal accounts, which is calculated as part of the mortgage approval. This debt can cause lenders to be wary about approving another loan.

Some banks and lenders may automatically decline your application if you have taken CERB (Canada Emergency Response Benefit) payments or a CEBA (Canadian Emergency Business Account) loan this year.

If you have deferred payments on your current mortgage, those deferrals will be included in your credit report and could be one reason for your mortgage application to be declined. Alternatively, some lenders may want to see your payments active again before approving you for a new mortgage.

3) Does it matter if my business is a Sole Proprietorship, compared to a Corporation? 

Colby: Because income is claimed differently between the two business types, this can impact how banks and lenders view your mortgage application. Since you need to submit 2 years’ of tax returns and company financials, I advise clients to stick to the same business entity during this period to avoid confusion.

If your business is a sole proprietorship (where you claim all of your business income on your personal tax return), some banks and lenders will allow you to “add back” expenses to increase your stated net income. This includes motor vehicle expenses, business home use expenses and capital cost allowance. Other lenders may offer another option of “gross up” where you can increase your stated net income by 15%.

On the other hand, a corporation is a legal entity that is separate and distinct from its owners, and you would claim personal income either through dividends (also known as T5’d income) or employment income (also known as T4’d income). A few select lenders may allow you to “gross up” either income option.

4) How can I qualify for a higher mortgage if I have a low reported income on my tax returns?

Colby: Aside from tax returns & company financials, there are some lenders willing to consider other documents and information when looking at your mortgage application, such as these:

Using Stated Income

This is a mortgage default insurance program where if you put down a minimum 10% down payment and pay an insurance premium, you have the option of stating a higher income.

Looking at Your Cash Flow Analysis

There are a few select lenders who will offer to do a cash flow analysis on your business and allow the surplus to be declared as additional income.

For this option, you aren’t required to pay an insurance premium but keep in mind that they may charge you a higher interest rate. This option may not work if there is more than one shareholder in the company.

B Lenders

For self-employed individuals that have been in business for less than two years or with a poor credit score, you could consider going to a B lender who typically only require the last 6 months of your business bank statements to confirm the income stated in your application.

The downside is that B lenders charge 1-4% higher interest rates compared to traditional banks/lenders, in addition to lender fees ranging from 0.5-2%.

5) Are there any tips you can offer to help make mortgage payments more manageable?

Ali: Similar to moving back in with your parents to save costs, one of the options I offer to clients is to purchase a home where multiple members of the family can live together and in turn, collectively contribute to the household costs and mortgage payments.

In Cornerbrook (NE Calgary), this is a growing trend as there are larger homesites that can accommodate these larger homes. One of Trico’s models, the Springhill, offers a 5 bedroom, 4 bathroom floorplan with a main floor bedroom & full bathroom, flex room, spice kitchen, two master bedrooms upstairs and multiple living rooms.

Despite the size, this is still a very affordable home and I’ve worked with several clients who are also self-employed. Some of them are transport drivers and love this area because it’s close to major roadways and the community’s wide roads make it easy to drive large vehicles in and out. Outdoor space is also abundant in Cornerbrook with its several ponds, parks and pathways.

We also offer a variety of other home models that can be tailored to your liking, starting from $500,000 and ranging in size from 1,943 to 2,673 sq. ft.

With homes now more affordable than ever before, this is a fantastic time to purchase and we hope this information can help guide you through the mortgage approval process.

If you have any additional questions, our team is always happy to help. You can also reach out to Colby or Ali at the contact details below.

Colby Sawatzky: colby@firstavefinancial.com, (403) 938-6888

Ali Tahir/ Trico Homes Cornerbrook: cornerbrook@tricohomes.com, (403) 474-7271