Here's What You Should Know About Getting a Mortgage as a Self-Employed Borrower
Being your own boss comes with plenty of advantages. You make your own decisions, build your own business and enjoy the rewards of your hard work. But when it comes to qualifying for a mortgage, being self-employed can sometimes make things a little more complicated.
That's because traditional mortgage lenders often rely heavily on the income reported on your tax returns. And as many business owners know, the income you report for tax purposes doesn't always tell the whole story. Fortunately, there are mortgage solutions designed specifically for entrepreneurs and self-employed Canadians.
Why Is It Sometimes Harder for Self-Employed Borrowers to Qualify?
For salaried employees, verifying income is usually relatively straightforward. A recent pay stub, employment letter and tax documents may be enough to demonstrate consistent earnings. For self-employed individuals, however, income can be more difficult to assess because business owners often deduct legitimate business expenses to reduce their taxable income. While this makes sense from a tax-planning perspective, it can create challenges when applying for a mortgage.
For example, you might operate a successful business that generates substantial revenue, but your personal tax return may show a relatively modest net income. Traditional lenders may use that lower reported income when calculating how much you can afford to borrow. As a result, you could find yourself qualifying for a smaller mortgage than you expected, even though your business is financially successful.
What Do Mortgage Lenders Look For?
When reviewing a self-employed mortgage application, lenders typically want to understand the stability and sustainability of your income. Depending on the lender and mortgage program, they may consider:
- How long you've been self-employed
- Your business revenue and profitability
- Your personal income and credit history
- Existing debts and financial obligations
- Your available down payment
- The type of business you operate
- Your overall financial position
Some lenders place significant emphasis on your reported taxable income, while others may take a broader approach. The key is finding a mortgage program that appropriately reflects your financial circumstances rather than trying to fit your income into traditional lending requirements that may not accurately represent your business.
What Is a Business-for-Self Mortgage?
A Business-for-Self (BFS) mortgage is designed to accommodate borrowers who earn income through self-employment rather than traditional salaried employment. These programs may offer alternative ways to verify income, depending on the lender. For example, some lenders may consider business bank statements, gross revenue or other financial documentation when assessing an application, while others may permit certain adjustments to reported income to account for eligible business expenses.
It's important to understand that BFS mortgages aren't all the same. Documentation requirements, qualification guidelines, interest rates and down payment requirements can vary considerably between lenders. Working with a mortgage professional who understands these programs can help you identify financing solutions that are better suited to your particular circumstances.
Can You Get a Mortgage With Less Than Two Years of Self-Employment?
Many traditional mortgage programs prefer applicants to have an established history of self-employment, often supported by two years of financial documentation. However, that doesn't necessarily mean someone who has recently started a business is automatically ineligible. Some lenders may consider applicants with a shorter self-employment history, particularly if they have previous experience working in the same industry or can demonstrate consistent earnings.
Other factors, such as your credit history, available down payment and overall financial strength, may also influence the lender's decision. If you've recently transitioned from employment to self-employment, it's worth exploring your options before assuming you need to wait two years to qualify.
How Much Down Payment Do You Need?
Self-employed borrowers may qualify for mortgages with relatively small down payments under certain traditional lending programs, provided they meet the applicable income verification, credit and mortgage insurance requirements. However, alternative lending programs may require larger down payments, particularly when income cannot be verified using conventional methods.
The amount required will depend on the lender, property type, purchase price and your overall financial profile. A larger down payment may provide additional flexibility and access to more lending solutions, but it isn't necessarily required for every self-employed mortgage application.
What Documents Should You Prepare?
Having your financial information organized can make the mortgage application process smoother and help lenders develop a clearer picture of your financial circumstances. Depending on your business structure and the lender's requirements, you may be asked to provide:
- Personal income tax returns
- Notices of Assessment from the CRA
- Business financial statements
- Business bank statements
- Proof of business registration or incorporation
- Documentation confirming your down payment
- Details of existing loans and financial obligations
Not every lender requires the same documents, and some specialized mortgage programs may offer more flexible income verification options. Your mortgage professional can help determine which documentation is necessary based on the financing solution being considered, saving you time and helping you prepare a stronger application.
Should You Speak With a Mortgage Professional Before Applying?
One of the biggest advantages of working with a mortgage professional is access to a variety of lenders and mortgage programs. Rather than approaching a single bank and hoping your income meets its requirements, you can explore financing solutions that may be better suited to how you earn your living. This can be particularly valuable for business owners with fluctuating income, significant business deductions or more complex financial arrangements.
Speaking with a mortgage professional early in the process also gives you an opportunity to understand your borrowing capacity, identify potential challenges and determine what documentation you'll need before you start shopping for a home.
Your Business Doesn't Have to Fit Into a Traditional Lending Box
You've worked hard to build your business, and your mortgage application should reflect more than a single number on your tax return. Mortgage financing isn't one-size-fits-all, and there are solutions specifically geared toward the unique income circumstances of entrepreneurs. Whether you're purchasing your first home, moving to a larger property or refinancing an existing mortgage, the right financing solution starts with understanding your business and your goals.
Contact Mark to discuss your circumstances and find out which mortgage solutions may work for you.