All About Self-Employed Mortgages in Canada

self employed mortgage

As of only a few years ago, 15% of Canadians were self-employed. With the current trend to escape from the office and the COVID-19 pandemic, Canada could see a considerable spike in self-employed people over the next few years. However, when it comes to buying a home and qualifying for a mortgage, self-employed Canadians are considered risky by traditional lenders. The reasons for this vary, but the consensus is that self-employed individuals have less predictable and regular income than conventional employees.

For self-employed individuals, part of the challenge of navigating the existing mortgage system is the mainstream lenders prefer stability over cash brought in at irregular intervals. Regular paycheques at roughly the same amount are the best source for a bank to know that you have the income to cover your mortgage. However, self-employed Canadians typically have varied cheques from week to week, resulting in these programs downgrading their rating for a mortgage.

As well, self-employed Canadians often expense a fair bit of their costs to save on taxes. These expenses can be perceived as unnecessary or risky spending, which can hurt people’s rating as their debt to service ratio could be unbalanced. Whether it is credit card debt that rotates or aggressive expenditure on your bank account, both can directly contribute to lenders struggling to approve these people for a mortgage.

All of that to say, it is not impossible for self-employed Canadians to qualify for a mortgage, but it does take a little bit of extra work. On this page, we will look at the current market, the rules in which self-employed people can utilize and showcase that yes, you can get a mortgage when you are self-employed!

How can a self-employed person get a mortgage in Canada?

Self-employed people can get a mortgage in Canada just like everyone else, but the documents and rules around mortgages are slightly different. Let us start with the documentation that you will need to get a mortgage if you are self-employed.

Self-employed mortgages

No matter if you are planning to work with a lender directly or working with a mortgage broker, you will need to prove to a lender that you can handle monthly payments. It might seem simple, but they look at your entire credit history, debt ratio, and other factors for lenders.

We should note that some self-employed people may qualify for a regular mortgage rate and product. These people will generally have regular monthly or bi-weekly payments that have been regular over the past few years where a lender can see a pattern.

If you do not qualify for a standard mortgage product, lenders do have some options for you. You will have to increase your down payment to 10% from the traditional lenders and prove a strong credit history. This can be a challenge for some, but it does mean that even if you cannot provide evidence of regular income, you can qualify for a mortgage through a standard lender. However, if you still struggle to get approved, you have other options.

Last but not least, self-employed Canadians can turn to alternative private lenders for their mortgage. Even if you have good credit and significant savings, sometimes lenders do not see the regular payments and refuse to move forward due to the risk portfolio. Private lenders typically charge a slightly higher interest rate and have additional fees when compared to traditional lenders. These lenders are concerned with debt-to-income ratios, and most self-employed people will enjoy easy approval due to this. No matter where you end up, make sure that your tax and business records are up to date so that there are no issues when going for approval at whatever lender you end up with for your mortgage. So, what documents are needed for a self-employed person to secure a mortgage?

Default insurance mortgages

One thing we should touch on is that a self-employed mortgage can also be default insured. Default insurance in Canada is required on any mortgage with less than a 20% down payment on the property. Canadian Mortgage and Housing Corporation provide most default insurance mortgages, but there are other insurers as well. These insurers offer borrowers an opportunity to put down less than 20% for a premium that insures the mortgage for the lenders. The vast majority of first time home buyers use these programs, and you can find out more on our default insurance page.

Although most lenders accept the minimum of 5% for a down payment with a CMHC mortgage, self-employed individuals may have a specific set of rules laid on them. For instance, we have seen some lenders increase the minimum for those who are self-employed to a 10% down payment. This is a good thing, as for many self-employed workers, the minimum down payment of 20% can be a struggle to get, especially in the ever-increasing real estate market we are now seeing. A default insurance mortgage is not a guarantee for self-employed workers, but with a good credit rating, solid net income, and a history of financial statements, you have an excellent chance to obtain a mortgage.

With default insurances touched on, let us move on to the actual application and the documents needed for a self-employed person to secure a mortgage.

What documents do I need for a self-employed mortgage?

Whether you are looking to work with a mortgage broker or directly with a lender, there is a lot of documentation that comes with your mortgage application for a self-employed person. The reason for this is that lenders are looking for you to prove your income. This proof of income can come in many different ways, but generally, it is through tax records, bank accounts or other contracts. Here are some of the more common documentation that we have seen lenders ask for in the past few months.

  • Evidence that you have paid your HST or GST in full.
  • Notice of Assessment from the Canadian Revenue Agency
  • Personal and Business Credit Score
  • Proof of principal ownership or sole proprietorship
  • Business Licence in the province you operate.
  • Contracts showing expected revenue for the next year and past revenue over the past two years.
  • Proof that the down payment that you intend to act as your lump sum has not been gifted from a friend, family member or business partner.

Remember, all of your business documentation and tax payments must be up to date before going through a mortgage approval. Lenders like to have things in order, especially when it comes to self-employed individuals, and this is an easy thing to do to help get your application approved.

How many years do you have to be self-employed to get a mortgage?

There is no specific period that you need to be self-employed, but there are general guidelines in which most lenders do-follow. Most banks will want to see at least two or three years of continual self-employment history. This history will let them see your stated income, any debts, and see if there is a history of continual and regular payments that will allow you to handle monthly mortgage payments.

However, you can apply before this, but it may be challenging to use banks, credit unions or other traditional lenders. As these conventional instructions rely on complicated calculations, self-employed individuals can struggle to gain approval.

Can you get a mortgage loan if you are self-employed?

Yes, you can get a mortgage if you are self-employed, but a few things can help increase the odds that you will be approved. As banks and other financial lenders have a rigid standard for proof of income, some people who work for themselves can struggle with these approvals. Here are a few ways to help increase your odds to enter this crazy real estate market.

Factors that can help lead to approvals

Here are the top five factors that go into a self-employed approval and how to increase the odds that a lender will take you on as a client.

Credit score

Your credit score is one of the most significant factors in making you more attractive to a lender. Credit scores take a little to grow, but you must pay attention and keep that score going up. You can keep achieving positive scores by paying off credit card debt, ensuring debts never go to collections, paying bills, including loans, on time and even accepting credit increases that are offered. As well, if you have been to collections, work to get that expunged from your record. Further to that, ensure that you are constantly working to grow your credit score and limit large transactions that hit your credit before going for a mortgage. The higher your credit score, the more attractive your offer will be to lenders, which is essential whether you are self-employed or not.

Down payment

Lenders like to see equity in a home. It provides them with some security if you do not pay for the mortgage and gives you some breathing room if you need to borrow against the home. Due to this, a larger down payment is one of the best ways to ensure that you get approved for a mortgage. The larger the down payment, the less the bank will need to lend, which lowers the lender's risk. It is a simple equation that can help move a potential approval to an approval decently quick.

Paying down debt

As lenders look at debt service ratios and total debt ratios, the less debt you have on your file, the better your application. Spending can be an issue for self-employed individuals due to the number of write-offs, but controlling that spending and keeping credit card or line of credit debt down is a great way to help get your loan approved. Long story short, if you can get rid of any large debts a few months before applying for your mortgage, you will be in an excellent position to move forward.

Accurate record keeping

As a lender will be taking a risk on you, the least you can do is make sure that your business records and tax records are in order. This will include precise accounting, transparent balance sheets and tax receipts that showcase that you paid on time and in full. It might seem like a simple thing, but being organized in your records will show a lender that you can be trusted moving forward. This trust can mean the difference between being approved or denied, and doing the little things like clean and accurate record-keeping will make a difference.

Employment history

As you will not be able to provide a T4 from your own company, you need to showcase your employment history to the lender and provide a stated income. This history of employment can be through contracts or other material that shows that you are working and not sub-contracting to others. The rule of thumb is that a lender will not consider self-employment income unless the company has been in operation for 2 to 3 years. This rule might seem old-fashioned, but it does provide lenders with a history of employment, income and debts.

Is it hard to get a mortgage if you are self-employed?

It is hard to answer this question, as it does depend on your situation. Mortgages, in general, are not an easy thing to get. You cannot simply walk up to a lender and demand a mortgage. However, if as a self-employed individual, you will face some significant challenges to overcome to prove your income and showcase that you are a good candidate for a mortgage. These challenges are that lenders do not like a risk when it comes to residential mortgages. The lower the risk that a lender is taking, the better the loan’s chances will be approved. Consider this from a bank’s standpoint.

Person A

Government of Canada indeterminate worker who has been in their position for three years. Has minimal debt (including credit cards and loans) and owns their vehicle outright—person A has a 650 credit score and $20,000 for a down payment.  

Person B

Person B is a self-employed person who has one year of experience running their own company. With a consolidated line of credit being paid down monthly, that handled opening expenses of the company. This person also financed their car for a write-off on their personal taxes. Person B has a 720 credit score and $50,000 for a down payment.

From a bank’s perspective, Person A has less risk as they are stable with a regular paycheque. Even though Person B has a better credit score and larger down payment, Person B, from a bank’s perspective, will need an additional review on their file before being approved.

Thus, as we stated above, is it hard to get a mortgage as a self-employed person? It could be, but it could also be straightforward. It depends entirely on your situation, and if you are considering applying for a mortgage, it might be best to chat with a mortgage broker. Mortgage brokers will give you a leg-up in terms of your application and allow you to ask any questions you may have about being self-employed and applying for a mortgage.