Can I Get a Mortgage if I’m Self-Employed?

I get it, Toronto is cool. It’s got an incredible nightlife teeming with exceptional cultural experiences and access to amazing food from every corner of the world. It’s also a city featuring a significant number of people who work for themselves.   Currently, this group of young, self-employed contract workers is part of a growing demographic that make up the “gig” economy. These urban, single professionals are considered to be one of the largest segment of potential condo buyers in Toronto, unfortunately, with income that is variable and unpredictable, their ability to obtain a mortgage is tougher. With condo prices increasing and mortgage lending requirements tightening every day, self-employed workers need to be prepared sooner than later if their goal is to own a property in Toronto. Here is everything you need to know to prepare you to qualify for a mortgage and start living the Toronto life.

The Basics

Let’s start with the basics. In the eyes of a mortgage lender, there are many kinds of workers who are considered self-employed (See below).

• Incorporated business owners that pay themselves a salary from their corporation
• Registered business owners
• Incorporated professionals
• Contract workers in a company (ie. Real Estate agents, independent contractors)
• Lyft and Uber Drivers

The general rule of self-employment is that if you don’t receive a regular paycheck from an employer then you are considered self-employed.

What Should You Do Before You Apply for a Mortgage?

You will need to compile a significant amount of documentation prior to applying for a mortgage with a lender. If you have the following documents prepared ahead of time, it will make the lending process much easier and reduce potential headaches. Self-employed workers generally obtain mortgages through stated income applications through the lender. These applications require proof of self-employment and a signed income declaration (Canada Revenue Agency’s notice of assessment and the Statement of Business or Professional Activities – form T2125). The stated income is simply how much you claim you have earned. If you claim a certain amount, you must be prepared to prove it by submitting the following documents:

• Your income tax returns and notices of assessment for the previous two to three years;
• Your Notices of Assessment from the Canada Revenue Agency to confirm you have no tax liability. Keeping up your tax payments shows your reliability;
• Proof that your HST and/or GST is paid in full;
• A copy of your business license or articles of incorporation showing you’re licensed;
• Financial statements for your business. You have to be ready to explain your business—your income, expenses, and when you believe that you’ll eventually break even;
• Proof that you are a principal owner in the business;
• Client contracts showing expected revenue for the coming years; and
• Have a down payment available of at least 15%.

Once you prove your stated income, then the normal mortgage loan approval process takes place. The lender will look at your credit score (you should make sure that there are no errors or negative credit lowering your score before you apply). If it’s possible, try to pay down your credit cards and any lines of credit you might have prior to submitting your application ie. auto loans, student loans, etc. The lender will use that information to assess your gross debt service (GDS) and total debt service (TDS) in order to calculate the maximum monthly amount you might be able to pay for a home. The less debt outside the mortgage you are applying for, the better. The most important thing for an entrepreneur is to keep your debt low. One way to avoid the possibility of getting rejected is to have a significant other who is a salaried worker co-sign the mortgage. Keep in mind however that a co-signer will get title ownership to the property as well, so it should be someone you trust enough to go into ownership with them!

What if You Still Get Turned Down?

Self-employed Canadians have a few options, should they be turned down for financing.

• Consider waiting a little longer to purchase a home. I know that’s not what you wanted to hear, but if you can save more money for a larger down payment, that will mean that you will have to borrow less money from the lender.
• Find a family member with good credit and a well-paying salaried job that would be willing to co-sign or be a guarantor on the mortgage.
• Visit a mortgage broker instead of your bank to see if they might be able to find alternative options for you. Be careful though. Going through alternative sources may result in a higher down payment requirement or higher fees.

Important Things to Focus On

The main points self-employed workers should focus on when deciding to move forward with home ownership are the following:

1. Start the collection of your financial documents early. Keep track of every work-related document, any contracts, or financial records that show proof of your income and your employment.
2. Make sure that you pay your taxes and that you do not owe anything to the government.
3. Talk to a trusted mortgage professional who specializes in self-employed mortgage lending before you go through the process. This can save you a lot of time and effort.

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Do you need a recommendation for a mortgage broker or have any questions? Call, text, or email me anytime!