You can qualify for a mortgage when you’re self-employed

Posted on April 7th, 2017

In BC, about 18% of the workforce is self-employed, according to Statistics Canada.

Most work out of their homes. If you’re one of them and you’re thinking of buying a home, when you go shopping for a mortgage, you should be prepared since you’ll be treated differently than if you work for someone else.

To increase your chances of qualifying, you’ll need to be familiar with what lenders require and what questions they’ll ask.

Mortgage lenders at banks and credit unions consider you to be self-employed if you:

  • run a business alone as a sole proprietor, with a partner, or as a corporation;
  • receive 25 per cent or more of your income from the business;
  • work on short contracts for different employers; or
  • are paid solely on a commission basis.

You’re not self-employed if you receive a regular paycheque from an employer, even if it’s part-time work performed for more than one employer. Under these circumstances you are considered a salaried employee.

Lenders evaluate salaried and self-employed borrowers the same way − on the size of their downpayment and on their ability to repay the mortgage. But there is a difference. Salaried borrowers must verify gross income through paycheques or a letter from an employer. Self-employed borrowers must verify net income, or what’s left after business deductions are subtracted from gross earnings.

For example, as a self-employed person, if you make $100,000 annually in gross earnings but write off $30,000 for business expenses, you have net earnings of $70,000. Unless you have documentation to convince lenders your net income is higher, you’ll be treated the same way as a salaried employee making $70,000 annually.

As proof that you have a viable business and a good credit rating, and you’re making timely payments on loans and monthly bills, you’ll need to provide the past two years of the following documents:

  1. monthly bank statement;
  2. corporate tax return;
  3. business balance sheet;
  4. profit-and-loss statement;
  5. business credit card statements; and
  6. credit references or letters from financial institutions.

Some lenders may also ask for proof that your industry is growing and has prospects for future growth.

Lenders will average your earnings over a minimum of two years to get a big picture of your finances. This means that if your net income in 2016 was $100,000 and your net income in 2015 was $70,000, you may qualify for a loan based on an average income of $85,000.

With the new mortgage rules you’ll need to have a downpayment of at least 20 per cent.

You’ll also need to provide documents including:

  • a letter from your accountant;
  • proof that you pay your rent on time; and
  • a personal balance sheet showing assets such as stocks, and debts such as credit cards or car loans.

Make photocopied sets of all your documents and prepare them as a package. Also have them available electronically so you can email them to lenders.

Since you’ll likely shop for a mortgage at different financial institutions or using a mortgage broker, you’ll want to present yourself as an organized and responsible borrower.

As a self-employed business owner, getting a mortgage with a good interest rate depends on your ability to maintain payments and your preparation.

For more information, contact a Royal Pacific Realty Group Realtor®.

Sources: REBGV; Statistics Canada Table 282-0012