A guide to Self Employed Mortgages in Canada

The ongoing stuggle between good business practice and “what works for the banks” presents itself when we are working with our clients to obtain self employed mortgages in Canada.  As a self employed person you know one the the advantages of being self employed is the flexibility that you have in how you show and structure your personal income.  It is also true that this can be a curse when working with banks to obtain financing.

These challenges arise in large part due to the traditional way that that banks calculate our personal income for mortgage qualification: With employed clients all of their income is shown on their personal tax return, where as with self employed clients much our true income is retained within our corporations or written off, with only a minimual living amount being shown on our personal returns.  It is very common for our incorporated self employed clients to make well over $100 000 annually but show only between $30 000 and $50 000 personally.

The key to understanding self employed mortgages in Canada is to know that all mortgages are a combination of our down payment, credit, and income.  With this in mind if we require exceptions to our standard income qualifications then our down payment and credit have to be stronger.

So where does this leave us with our options for self employed mortgages in Canada?

Step 1: Based upon your personal tax return income, can we qualify you for a mortgage in the same way as an employed client?  If so and you have two years of self employed history we can proceed the same as if you are employed.  This would afford best rates and terms and a minimal down payment of 5%. If you cannot – proceed to step 2.

Step 2: Assuming you cannot qualify based upon standard income qualifications, the next step is to check your down payment amount.  Your minimum for good rates and terms with flexible income verification is 20% down payment, we do have options at 15% down payment but they are shorter (one year) options and are generally priced higher.  Once we determine the down payment, mortgage pricing and selection is based upon your credit score and previous repayment history.

A couple of myths to dispell regarding self employed mortgages in Canada…

Myth #1: There is a self employed specialty program offered by CMHC with only 10% down payment

Fact: This is technically true as per CMHC, however the likelihood of you being approved if you have to state in excess of $75 000 for your personal income is about as likely as you growing a money tree in your back yard.  In all seriousness this program is a joke for almost all clients, CMHC has taken the attitude that this product is not for “self employed and incorporated clients” but rather for newly self employed borrowers and trades people.  I have been told by CMHC that clients should either “show more income and pay more tax or put more money down rather than use this program”.

Myth #2 My taxes have to be complete before I can do a mortgage

Fact: We have specialized self employed lenders who will lend based upon the above discussed guidelines without requiring any confirmation of your taxes being up to date.

The advantages of working with a broker with expertise in obtaining self employed mortgages in Canada:

The advantage for you in working with a specialist in this field could be the difference between you being able to purchase your new home or not.  The most important item to guage is the strength of the mortgage broker’s relationships with his lenders and funders.  The self employed mortgage lending field in Canada is not a very large one with all of the players being very aware of each other’s offerings and reputations.  Given my long standing relationships with our lenders we are often able to mitigate factors such as tax arrears, limited self employed history, or credit challenges in your favor and ensure you receive the best rates and terms for your unique situation.  The second critical factor is the mortgage broker’s knowledge about this specialized area of lending.  It is important to understand that self employed lenders and programs have very specific and unique requirements – sometimes presenting a client in a certain way to a lender will result in a decline while a different method of presentation will result in an approval.

This is not an equal business but it is a fair one

What I mean by this is that if you have poor or unknowledgable representation you might not receive the same benefits or level of lender consideration as having experienced, professional representation.

If you are self employed or interested in learning more about self employed mortgages in Canada please feel free to call or email me.