Applying for a mortgage from a bank or credit union can be stressful at the best of times. The approval requirements are strict, with borrowers needing strong creditworthiness and employment and income stability. That’s in addition to saving up the down payment. 

The process can be even more challenging if you’re self-employed.

So why is it so difficult for self-employed Canadians to qualify for a mortgage? There are a few reasons, but it isn’t impossible, even if you’re recently self-employed.

In this article, I’ll explain how to qualify for a mortgage as a self-employed person, what documents you’ll need, and what lenders you should approach.

What Is a Self-Employed Mortgage?

A self-employed mortgage is a personal mortgage that is open to self-employed applicants.

Some lenders may have a dedicated product for self-employed clients, but in most cases, the term “Self-Employed Mortgage” is used for marketing purposes. The mortgage lender is indicating they are willing to consider self-employment income to qualify borrowers for a personal mortgage.

Note that the approval criteria, including income documentation, will vary between lenders. What your local credit union accepts may not qualify you at RBC or TD. And generally speaking, the higher your down payment, the more flexible the lender can be.

Why Is it Difficult to Get a Mortgage When Self-Employed?

It’s often more difficult for self-employed Canadians to be approved for mortgage financing. There are two primary reasons for this. First, self-employment income often fluctuates and is less consistent than standard employment income.

To be blunt, banks and credit unions don’t like fluctuating income; it makes them nervous. It doesn’t matter how long you’ve been in business – when they see income going up and down, they’re going to require additional documentation. 

The second reason it’s more difficult is that banks and credit unions use your net income to qualify your application. (Net income is reported on Line 150 of your income tax return).

One of the benefits of being self-employed is that you can deduct numerous business expenses from your gross income and reduce your taxable income. The trade-off is that your net income will often be far lower than what you actually earned.

I’ve seen business owners with gross incomes over six figures report a taxable income of less than $30,000 after all of their deductions. It’s perfectly legal, but it doesn’t help you when you try to borrow money. 

In short, the lender’s position is that “you can’t have your cake and eat it, too.” 

That said, lenders will often “gross up” income for self-employed applicants by adding back some of the deductions that were written off. However, it’s often not enough to meet the approval requirements, specifically debt servicing requirements. 

Different Types of Income Confirmation

When you apply for a mortgage, you will be required to provide income confirmation documents. Below is a list of standard income documentation for traditional, fluctuating, and stated income scenarios. 

Traditional Income Mortgages

Common Documentation Requirements: One or more recent paystubs, T4 slip (most recent tax year), bank statements with confirmation of direct deposit, letter of employment, and Notice of Assessments.

Traditional income refers to salaried or hourly income from regular employment. You work for a company in exchange for a regular paycheque. Mortgage lenders like traditional income sources, as the income tends to be stable and consistent. Income confirmation is usually provided through one or more recent pay stubs, employment letters, or an annual T4 slip supported by a recent direct deposit confirmation (or pay stub).

Most self-employed individuals don’t earn traditional income and can’t provide a paystub or T4 slip. They don’t work for a company; they work for themselves. One exception would be a business owner who draws a salary from a corporation. They are self-employed but draw a regular salary from their business, which can be reported on a T4 slip or pay stub.

Fluctuating Income Mortgages

Common Documentation Requirements: Two years of accountant-prepared income tax returns (including the Statement of Business Activities) and Notice of Assessments, accountant-prepared financial statements (if applicable).

Most self-employed individuals fall into the fluctuating income category. Their income will change month-to-month depending on how much work they’ve received. For example, many long-haul truck drivers are self-employed owner-operators. Their income will fluctuate depending on how many miles they drive each month. Some months are busier than others.

Seasonality also plays a factor in many small businesses. A person who owns a landscaping company will earn a lot more money during the summer than in the winter. The same goes for a home builder.

As you can imagine, it’s difficult for mortgage lenders to understand a person’s income when it’s constantly fluctuating. As a result, lenders typically ask self-employed borrowers for two years of accountant-prepared income tax returns, using the average of the two years. However, if the income in the most recent year is lower than the previous year, they may use the lower amount to qualify for the mortgage or ask their client to provide an additional year.

Stated Income Mortgages

Sometimes, a self-employed borrower cannot provide income confirmation that meets the requirements laid out by the mortgage lender. Often, this happens because the business owner has used various tax deductions and credits to reduce their taxable income to a level that won’t support their mortgage application. With a good accountant, a truck driver who earns a gross income of $120,000 may reduce their taxable income to $20,000 by deducting various expenses, such as mileage, meals and lodging, vehicle repairs, depreciation, etc.

This helps reduce your income tax bill but makes it harder to qualify for a mortgage when you only report a net income of $20,000. It’s a catch-22.

In this case, some mortgage lenders (B and Private lenders) will approve the mortgage with no income confirmation. This is known as “stated income.” However, the borrower will need to increase their down payment percentage or provide confirmation of high net worth.

Most A lenders (banks) will only consider stated income if a client can provide 50% or more as a down payment and prove investable assets above $500,000 or $1MM or more. Even then, approval is an exception only.

What Documents Will I Need to Provide for a Self-Employed Application?

Depending on your lender, you’ll need to provide several documents to support your mortgage application. As it’s best to be prepared, make sure you have access to the following:

• Two most recent year’s Notice of Assessments (NOAs)
• Two most recent year’s income tax returns (Accountant-prepared)
• Statement of Business Activities from your income tax return
• Proof of income taxes paid (to show that there are no arrears)
• Evidence of business ownership (Articles of Incorporation, Business Name Registration, Business License, bank account confirmation, bank statements, Business number)
• Accountant-prepared financial statements (corporations)
• Gift letter (if receiving a down payment as a gift from a family member)
• List of assets and liabilities (personal net worth statement)
• Confirmation of investments (all financial institutions)

CMHC Self-Employed

When a borrower has less than 20% available for a down payment on a home purchase, their mortgage must include mortgage default insurance, also known as CMHC insurance. CMHC stands for Canada Mortgage and Housing Corporation, and it protects lenders against default on high-ratio mortgages (mortgages with more than 80% loan-to-value).

When you apply for a CMHC mortgage, two approvals are required: the approval of the lender and the CMHCs approval. You only have to apply once; your lender will automatically send your application to CMHC for approval.

CMHC has strict approval requirements surrounding income confirmation, credit history, etc. But they also understand the challenges faced by many self-employed borrowers.

So, CMHC has a self-employed policy, which enhances flexibility for satisfying income and employment requirements. Here’s how it works:

Here are the key features of the CMHC Self-Employed Program:

1. Available to different self-employed types, including sole proprietors, partnerships, and corporations. Business owners should be self-employed for two years.

2. Flexibility for recently self-employed. If you cannot confirm two years of self-employment history, CMHC will consider the following factors to support their approval decision.

• If you purchased an established business
• Have sufficient cash reserves
• Earnings are predictable (e.g., government contract)
• You have relevant training and education in the field
• Excellent credit history

In addition, CMHC will consider the following documentation to support your income:

• Previous employment documentation
• Recent bank account statements
• Business documentation
• Signed contracts

3. CMHC will allow a 15% gross-up of business income for sole proprietors and partnerships to “add back” some of the deductions from gross income.

The following standard CMHC lending criteria also apply to self-employed borrowers:

• At least one borrower must have a credit score of 600 or higher.
• Maximum purchase price of $1 million.
• Loans of up to 95% LTV for owner-occupied (1 or 2 units)
• Loans of up to 90% LTV for owner-occupied (3 or 4 units)
• Downpayment cannot be borrowed (must come from savings, sale of property, gift from family)
• Maximum GDS 39%/TDS 44%
• Property must be located in Canada and be suitable and available for full-time occupancy

Where to Get a Self-Employed Mortgage

Self-employed borrowers can get a mortgage from just about any mortgage lender in Canada if they can meet the qualifying criteria of the particular lender. Mortgage lenders fall into three categories: A lenders, B Lenders, and Private Lenders. Let’s take a look at the characteristics of each type of lender.

A Lenders

A lenders include the major Canadian banks and most credit unions. To obtain a mortgage with an A lender, you generally need strong credit, stable income, and employment. A lenders may accept a strong cosigner if a borrower cannot qualify on their own merit.

Here is a list of well-known Canadian A Lenders:

• Royal Bank of Canada
• TD Canada Trust
• Bank of Montreal
• Scotiabank
• CIBC
• Canadian Western Bank
• Vancity Credit Union
• Steinbach Credit Union
• MCAP
• RMG Mortgages
• First National

B Lenders

If you are self-employed and have trouble getting your mortgage approved through an A lender, consider a B lender. B lenders aren’t subject to the same regulations as the big banks, so they tend to be more accommodating. Home Trust and Optimum Mortgage are good examples of B lenders. 

Private Lenders

Private lenders should only be considered as a last resort. They are equity lenders, meaning they will consider borrowers with poor credit histories who cannot meet the stricter income requirements of an A or B lender. Private lenders offer fast approvals and funding. Your application will often be approved within 24 hours.

But private lenders should be considered a temporary solution as their interest rates are much higher than A and B lenders. For example, if you are recently self-employed and don’t have two years of income history, you may qualify with a private lender.

Once your business has been up and running for a couple of years, you can try to qualify with a bank or credit union, and close your private mortgage.

Final Thoughts on Self-Employed Mortgages

In recent years, many mortgage lenders have relaxed their lending criteria for self-employed borrowers, recognizing the differences in how they earn income. Even mortgage loan insurance companies like CMHC are making accommodations for the self-employed.

This means that you shouldn’t assume that just because you work for yourself, you won’t be able to get a mortgage. Your best bet is to talk to a mortgage broker, who has experience getting self-employed mortgages approved. They can shop your application to an A lender; if unsuccessful, they can approach B and private mortgage lenders.

If you’re thinking about switching from regular employment to self-employment, just be aware that you may not be able to get a mortgage until your business is more established. This can take up to two years. For this reason, a best practice is to look after any borrowing needs before making the leap to self-employment.