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What is a self-employed mortgage?

Homeownership is a pathway to financial and emotional freedom for many seeking to live the Canadian dream. For people with traditional employment, this means getting a mortgage that’s repaid over several decades.

But for the self-employed (as a growing number of Canadians are), it can be difficult to qualify for a conventional mortgage. That’s why self-employed mortgages were developed. In this guide, we’ll explore what these loans are, who they’re for, and exactly how they work.

Understanding the Basics: What’s a self-employed mortgage?

A conventional mortgage is simply a long-term loan. A lender (usually a bank) loans money to the prospective homebuyer allowing them to pay for the home outright. That loan is then paid overtime (often over an amortized period of 25 years). To ensure you are qualified for this loan and capable of repaying it, lenders will evaluate your financial situation. The most important metric the lender uses to evaluate your ability to pay back the loan is your income. The more money you make, the bigger the mortgage you can afford.

This is where self-employed people run into problems. Most self-employed people are diligent about deducting as many legitimate business expenses as possible. That includes transportation, office space, equipment, professional services, and so on. This allows small business owners to report a relatively low income, which keeps their income tax obligations small. But a low income, from a lender’s perspective, is a red flag. It means you can’t afford a major loan.

Self-employed mortgages are one solution to acquiring home purchase financing. They allow you to qualify for a mortgage by providing alternative documentation to prove your financial liquidity. This can include tax documents, customer invoices, bank deposit slips, and so on. The financial benchmarks you need to hit may be loose or stringent, depending on the type of self-employed mortgage you acquire. Generally speaking, you’ll need to provide more evidence of your earnings to obtain lower interest-rate mortgages.

Who is considered “self-employed” in Canada?

To be considered self-employed, you need to run your own business, either alone or with a partner. For example, sole proprietors or small companies, freelancers, commission sales workers, fishers, and farmers are all self-employed. If you find clients and generate sales directly, rather than receiving paychecks from a traditional employer, you are self-employed. While rules vary, many lenders require that you have been self-employed for at least two to three years to qualify for a self-employed mortgage.

The three major types of self-employed mortgage.

Self-employed mortgages are roughly grouped into three categories:

Requirements to get a self-employed mortgage.

The most important thing to understand about qualifying for a self-employed mortgage is that every lender is different. This means financial benchmarks and documentation vary considerably – especially between A lenders, B lenders, and private lenders. That said, there are some rough guidelines you can expect to encounter:

Self-employed mortgage requirements by lender type

 A Lenders (Major Banks)B LendersPrivate Lenders
Interest rates
A Lenders (Major Banks)
2-4%
B Lenders
3-10%
Private Lenders
7-18%
Down Payment
A Lenders (Major Banks)
5-20%, depending on whether you get mortgage insurance
B Lenders
10-20%
Private Lenders
Up to 35%
Credit Score
A Lenders (Major Banks)
As low as 620
B Lenders
As low as 500
Private Lenders
No minimum, depending on lender
Required Documentation
A Lenders (Major Banks)
• Notice of Assessment
• 2-3 years tax statements
• Articles of incorporation
• Proof of monthly income
• List of current assets & liabilities
B Lenders
• Notice of Assessment
• 2-3 years tax statement
• Articles of incorporation
• Nontraditional documentation of income, including invoices, bank deposit slips, and other corporate financial documents
Private Lenders
• Notice of Assessment
• Document stating your income

Should you get a self-employed mortgage? The pros & cons.

Getting a self-employed mortgage is a major life decision, with both drawbacks and advantages to consider. Let’s review some of these pros and cons:

Your questions about self-employed mortgages, answered.

When can I get a self-employed mortgage?

There’s no hard and fast rule about how long you need to be self-employed to qualify for a self-employed mortgage. Different lenders have different requirements. You will not qualify for a self-employed mortgage if you just started your own business. Most lenders – especially A Lenders – require you to have at least two years of self-employment history before you qualify.

Are self-employed mortgage rates higher than conventional mortgage rates?

Not necessarily. Some self-employed mortgages (especially those issued by A lenders) come with very competitive low rates. But as with traditional mortgages, the lowest rates typically go to borrowers with the best financial qualifications. That means high income, low debt, good credit, strong assets, and few liabilities.

What is a mortgage stress test?

A stress test is how lenders double-check your financial qualifications to ensure you’re able to afford your mortgage. To stress-test your mortgage application, a lender assesses whether you could make payments if the interest rates were significantly higher – either at the Bank of Canada official rate or at their proposed interest rates plus 2% (whichever is greater). If you can afford the mortgage at this hypothetical higher rate (called the “qualifying rate”), you pass the stress test.

What is a mortgage stress test?

A stress test is how lenders double-check your financial qualifications to ensure you’re able to afford your mortgage. To stress-test your mortgage application, a lender assesses whether you could make payments if the interest rates were significantly higher – either at the Bank of Canada official rate or at their proposed interest rates plus 2% (whichever is greater). If you can afford the mortgage at this hypothetical higher rate (called the “qualifying rate”), you pass the stress test.

Does your gross income or net income matter for a self-employed mortgage?

When a lender reviews your self-employed mortgage application, it assesses a number called the loan-to-value ratio (LTV). The LTV is the value of the loan is divided by the value of the home. For example, if you’re requesting a $150K mortgage to buy a $200K home, the LTV is 75%. Mortgage lenders generally consider higher LTVs to be higher-risk loans. In other words, the less you’re covering out of pocket, the less skin you have in the game – and the more exposed the bank is to financial loss.

Certain lenders will cover your self-employed mortgage up to 95% LTV – if you also purchase default insurance. Other lenders cap out at 90%, even with insurance. Without insurance, you’re unlikely to find a self-employed mortgage above 80% LTV. And some private insurers will only go as high as 75% LTV. Of course, anything not paid for by the mortgage (i.e., the remaining 5-25%) will have to be covered in your down payment.

What is non-traditional income verification?

If you apply for a self-employed mortgage, the lender may use non-traditional income verification to ascertain your financial stability. This means considering forms of documentation that would not be considered for a conventional mortgage. For instance, instead of only considering your net income, the lender might review bank deposit slips, invoices from your customers, evidence of your company’s material assets, and a range of other internal corporate documentation that shows the true value of your company.

Which banks count as ‘A lenders’?

The A lenders are the “big six” nationwide banks within Canada: National Bank of Canada, Canadian Imperial Bank of Commerce (CIBC), the Bank of Montreal (BMO), the Bank of Nova Scotia (Scotiabank), Toronto Dominion Bank (TD), and Royal Bank of Canada (RBC). These banks are regarded as A lenders because they offer the best rates and must operate according to the most stringent regulations. They are also the most selective of all self-employed mortgage lenders.

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