mortgages for self employed canadians

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mortgages for self employed canadians

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 ‘SELF-EMPLOYED’  OR  ‘BUSINESS FOR SELF’  MORTGAGES

Self-employed people tend to expense as much as possible so as to reduce their tax liability resulting in lower reported incomes to the Govt. Banks worry that if income cannot be verified then they are at risk of the borrower defaulting. Fortunately we have many non bank lenders who will fund mortgages for the self-employed on ‘Stated Income’.

LENDERS WHO SPECIALIZE IN SELF-EMPLOYED MORTGAGES

Non-bank lenders such as credit unions, financial institutions, trusts etc are very happy to lend money to the self-employed. Self-employed people as a group tend to have high net worth, excellent credit ratings and historically have proven to be good borrowers.

DOCUMENT REQUIREMENTS FOR SELF-EMPLOYED MORTGAGES

You will need 2 years of Notice of Assessments, T1 and/or T2 Generals and HST statements to prove that you don’t owe money to the Government.

Articles of Incorporation or business license.

Because of tax write offs etc there will be a difference between your Govt declared income and your true income.

Lenders who specialize in ‘Self Employed Mortgages’ recognize this and allow you ‘Stated Income’  ‘Stated Income’ involves the lender looking at your industry and determining the average income of someone in the same employment.  ‘Stated Income’ is a complicated method to assess income and you will need to show as much as possible to substantiate your earnings this can include financials (ideally from an accountant), banks statements showing cash flow (6 months), and future contracts with customers. The more proof of you have to substantiate your position the better it looks to the lender. Most lenders require a minimum two-year track record of earnings, without 2 years a private Lender below might be the best option.

MORTGAGE DEFAULT INSURANCE FOR SELF EMPLOYED MORTGAGES

If you can prove income through your Notice of Assessments (like a standard employee) then you can get a mortgage with 5% down, if you can’t prove income you will need to put at least 10% down. If you put 20% or more down then you won’t need mortgage default insurance and the Lenders can be more flexible. Default Insurers info below.

SHORT TERM PRIVATE FUNDING FOR SELF EMPLOYED MORTGAGES

If you don’t quite qualify at the moment for the lower rates but will soon then a private mortgage can fill the gap. A private mortgage for 12 months or less, can give yourself time to improve your credit score or top off a two-year self-employed period to set yourself up for a ‘Stated Income mortgage. Private lending offers flexible, convenient solutions and will have higher interest rates plus lender/brokers fees. Private lenders are often business-minded individuals or syndicates with high liquidity. Private financing is a short term solution for a long term plan.

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Self Employed Mortgage

Tips to get the best Self-Employed Mortgage possible

 

Plan ahead

Consider your position on debt, expenses or business growth? Set your finances up through a certified accountant.  Lenders prefer to see self-employed income submitted through a professional. Make sure to discuss with them your mortgage objectives so they can set up your taxes appropriately.

Be Organized

Keep your financial statements, tax returns, T1 Generals, Notices of Assessment, etc. in good order. Keep them organized and accessible. Most importantly, have your taxes up to date! By having your documents in order and available to the lender, it helps instill confidence, thus helping you secure more favourable rates and terms.

Get your finances in order.

It is important to have the best credit history possible, so review and repair if need be.

Pay down debt; debt-service ratios are a major factor in a loan-approval assessment.

Consider using your savings to make a larger down-payment.  

Maybe have someone co-sign for the mortgage, be aware that a co-signer will also get title ownership to the property.

Stay consistent.

Lenders prefer that the self-employed work in a business that they’re familiar with and have expertise and experience in the field. The same for residential history; lenders prefer that you don’t move too much. Lenders like consistency and stability.

If you’re putting down less than 20% then you will need ‘Mortgage Default Insurance’ from one of Canada’s three Insurers below:

CMHC Self-Employed

Streamlining the Home Financing Process for Self-Employed Borrowers

CMHC offers mortgage loan insurance options for self-employed borrowers with traditional third party validation of income.

Features

■ Available for purchase and purchase with improvements.

■ Flexible financing options – single advance and progress advances are available.

■ Interest rate types include: Fixed, capped and standard variable, and adjustable.

■ Self-employed borrowers with documentation to support their income have access to all existing 1 – 4 unit CMHC Mortgage Loan Insurance products subject to the same product criteria and insurance premiums as salaried borrowers.

■ CMHC homeowner mortgage loan insurance is available to a maximum of one owner-occupied property (1 – 4 units) per borrower/co-borrower at any given time.

■ CMHC offers mortgage loan insurance premium refunds for homeowners who purchase an energy-efficient home or purchase an existing home and make energy-saving renovations.

See CMHC Green Home for more information.

Benefits of CMHC Self-Employed

Access to Homeownership

With a minimum down payment starting at 5%.

Competitive Interest Rates

Access to CMHC-insured financing, and as a result, competitive interest rates.

Availability Products and services available coast-to-coast-to-coast.

This information provides product highlights on CMHC’s Mortgage Loan Insurance products. Any requirements that are described would be subject to CMHC’s mortgage insurance terms and conditions and underwriting policies. Products and their terms and conditions may change at any time. © 2017, Canada Mortgage and Housing Corporation.

17-03-17 CMHC

Self-Employed Product Highlights:

Loan Purpose Purchase, purchase with improvements, single and progress advances Loan-to-Value (LTV) Ratio Purchase: up to 95% LTV (1 – 2 units) up to 90% LTV (3 – 4 units) Down Payment Traditional* and Non-Traditional** Sources

Maximum Amortization 25 years

Minimum Equity Requirement 5% down payment for the purchase price (or lending value) portion ≤ $500,000. 10% down payment for the purchase price (or lending value) portion > $500,000.

Maximum Purchase Price Maximum purchase price or as-improved property value must be below $1,000,000.

Borrower Eligibility Permanent residents including newcomers to Canada. Non-permanent residents are limited to a 1 unit owner-occupied property and a maximum LTV of 90%. Approved Lenders are to verify, prior to submitting an application to CMHC, that the borrower(s) does not have existing CMHC-insured homeowner financing.

Lender Requirements Borrower’s Notice of Assessment (NOA), audited financial statements or review engagement financial statements prepared by practising accountant. Income determined by averaging the income of the previous two year period or using most recent year if income has increased year over year for 4+ years. Confirmed NOA income can be grossed up 15% in cases of sole proprietorship or partnership. Income taxes must be paid and up to date.

Employment Requirements Minimum 2 years in same type of work, even if not in a self-employed capacity.

General Guideline for History of Managing Credit*** At least one borrower (or guarantor) must have a minimum credit score of 600. Standard variable rate mortgages (LTV 90.01% – 95%): Recommended min. score of 610.

Debt Service Guideline*** Credit score: GDS/TDS: < 680 : 35% / 42%, 680+ : 39% / 44% Debt service flexibilities are based on an assessment of the strength of the overall application. Satisfying the minimum credit score alone does not automatically entitle the borrower to debt service flexibilities.

Loan Security First Mortgages and Chattel Mortgages

 

Applicable Premiums (Owner-occupied properties) Loan-to-Value Ratio Premium on Total Loan Amount Up to and including 65% 0.60% Up to and including 75% 1.70% Up to and including 80% 2.40% Up to and including 85% 2.80% Up to and including 90% 3.10% Up to and including 95% Traditional Down Payment* 4.00% Non-traditional Down Payment** 4.50% Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax – the sales tax cannot be added to the loan amount. * Traditional sources of down payment include: Applicant’s savings, RRSP withdrawal, funds borrowed against proven assets, sweat equity (< 50% of minimum required equity), land unencumbered, proceeds from sale of another property, non-repayable gift from immediate relative, equity grant (non-repayable grant from federal, provincial or municipal agency). ** Non-traditional sources of down payment include: Any source that is arm’s length to and not tied to the purchase or sale of the property such as borrowed funds, gifts and 100% sweat equity. *** Individuals can access their scores and credit reports from the following credit reporting agencies: www.equifax.ca or www.transunion.ca.

GENWORTH Self-Employed

This program is designed for self-employed borrowers who are unable to provide traditional income verification but have a proven 2-year history of managing their credit and finances responsibly. Eligible borrowers typically own a small size business for a minimum of two years, which can be confirmed via a third-party arm’s length document. In addition, the borrower is required to declare their annual income and annual business revenue, which should be reasonable based on the industry, length of operation and type of business.

Note: To ensure eligibility for this program, please refer to the corresponding lender updates below addressing recent changes to the mortgage insurance guidelines:

Loans > 80% LTVSubject: High-Ratio Mortgage Insurance Changes

Loans ≤ 80% LTVSubject: Low-Ratio Mortgage Insurance Changes

Acceptable Loan Purpose & Applicable Loan-To-Value Limits:

  • Purchase transactions: 90% LTV 1 & 2 units

Loan Security:

  • First and second mortgages

Eligible Properties:

  • Maximum 2 units where 1 unit must be owner occupied
  • New construction covered by a lender approved New Home Warranty Program
  • Existing resale properties
  • Readily marketable residential dwellings, located in markets with demonstrated ongoing re-sale demand
  • Estimated remaining economic life of the property should be a minimum of 25 years

Maximum Property Value:

  • Property value must be less than $1,000,000

Maximum Loan Amounts:

  • Metro Toronto, Metro Calgary & Metro Vancouver: $750,000
  • Rest of Canada: $600,000
  • Exceptions will be considered on a case-by-case basis

Qualifying Terms And Interest Rates:

  • Fixed, standard variable, capped variable and adjustable rate mortgages are permitted
  • Maximum interest rate term of 25 years
  • The qualifying interest rate is the greater of the contract rate or 5-year benchmark rate

Amortization Options:

  • Up to 25 years

Premium Rates:

The premium payable will be the lesser of the premium as a % of the total new loan amount or the premium as a % of the top-up portion on the additional loan amount (if existing insured) based on the rates below:

LTV Ratio

Premium Rate

Top-Up Premium

Up to 65%

1.50%

3.00%

65.01% – 75%

2.60%

6.50%

75.01% – 80%

3.30%

7.00%

80.01% – 85%

3.75%

7.50%

85.01% – 90%

5.85%

9.00%

Note: The insurance premium is non-refundable, paid at the time of closing and may be added onto the mortgage

Borrower Qualification:

Income & Employment

  • Minimum of two (2) years business-for-self tenure
  • The self-employed borrowers stated income should be reasonable based on the length of operation, type and size of the business, and should be able to service the required mortgage as per the GDS/TDS guidelines
  • Reasonableness of the stated income should also be reflective of the personal financial profile of the borrower
  • Lender to provide the line 150 from the borrower(s) most recent years’ Notice of Assessment (NOA)

Credit

  • > 80% LTV Minimum credit bureau score of 650 is recommended
  • ≤ 80% LTV: At least one applicant should have a minimum recommended credit bureau score of 680
  • Minimum 2 trade lines with at least two (2) years history
  • No mortgage, installment or revolving credit delinquencies appearing on the credit bureau in the past 12 months
  • No reported defaults on residential mortgages for the past 7 years
  • No previous bankruptcy

Down Payment

  • ≤ 90% LTV Minimum 5% of the down payment from the borrowers own savings. The remainder may be gifted from an immediate family member.
  • Qualified home buyers may use traditional down payment sources including personal savings, non-repayable gift from immediate family member(s), proceeds from sale of property.

Additional Criteria

  • Borrowers with commission income are ineligible
  • Lender to ensure borrower(s) have no tax arrears
  • All applicants used to qualify must occupy the property (If two unit property, one unit must be owner occupied)
  • Spousal guarantors acceptable
  • Borrowers are permitted one (1) Genworth Canada insured Business for Self Program mortgage

Business Information Requirements:

Lender to provide the following information in the notepad to establish the type and size of the business, and help substantiate the reasonability of the borrowers stated income

  • Industry type/profession of the borrowers business
  • Business type (sole proprietor, partnership or incorporated and percentage ownership)
  • Borrower(s) to provide stated annual gross business revenue

Debt Service Ratios:

  • GDS 39% / TDS 44%

Documentation Requirements:

Sole Proprietorship

  • A one-owner operation where the owner directs all the activities of the business, assumes all authorities and obligations, and is liable for its business debts. The sole proprietor income is reported to revenue Canada on the standard tax return (T1 General) together with Revenue Canada’s required statement of business or professional activities.
  • Documentation requirements – Any one of the following must confirm at least two (2) years business-for-self tenure:
    • Business License
    • GST/HST Return Summary
    • T1 Generals with statement of business activities attached for a minimum 2 years prepared by an arm’s length third-party
    • Audited Financial Statements for the last 2 years, prepared and signed by a CA
  • Plus the most recent years’ Notice of Assessment from the borrower(s) to confirm the line 150 amount and no income tax arrears (Note: in the province of Quebec, both federal and provincial NOA’s will be required)

Partnerships

  • Partnerships are businesses owned by two or more individuals who share the profits or losses of the business operation. The partnership income is reported to Revenue Canada on the standard tax report (T1 General) together with Revenue Canada’s required statement of business or professional activities, which reflects the percentage of the NET income or loss for each partner of the enterprise.
  • Documentation requirements – Any one of the following must confirm at least two (2) years business-for-self tenure:
    • Business License
    • GST/HST Return Summary
    • T1 Generals with statement of business activities attached for a minimum 2 years prepared by an arm’s length third-party
    • Audited Financial Statements for the last 2 years, prepared and signed by a CA
  • Plus the most recent years’ Notice of Assessment from  the borrower(s) to confirm the line 150 amount and no income tax arrears (Note: in the province of Quebec, both federal and provincial NOA’s will be required)

Corporations

  • A limited company or corporation is a legal entity, separate from the persons (all shareholders) who own it. The business can own assets, enter into contracts and conduct business transactions in its own capacity. The company is called limited because the liability of the shareholders is limited to their investment. All provincial Corporations must obtain articles of incorporation from the province in which they are registered or may be federally incorporated. The applicant’s personal income will be reported by T4 from the corporation.
  • Documentation requirements – Any one of the following must confirm at least two (2) years business-for-self tenure:
    • Articles of incorporation
    • Audited Financial Statements for the last 2 years, prepared and signed by a CA
  • Plus the most recent years’ Notice of Assessment from  the borrower(s) to confirm the line 150 amount and no income tax arrears (Note: in the province of Quebec, both federal and provincial NOA’s will be required)

Portability:

Mortgage default insurance is portable under this program

  1. When porting from an ALT. A to another ALT. A mortgage, the premium will be the lesser of:
    • The increase in the loan amount multiplied by the top-up premium rates defined in the table above, or
    • The new loan amount multiplied by the full premium rate
  2. When porting from an ALT. A loan to an existing standard Genworth Canada insured loan, the premium will be the lesser of:
    • The increase in the loan amount multiplied by our standard premium top-up rates as described in our Portability feature Product Overview, or
    • The new loan amount multiplied by the full standard premium rate
  3. When porting from an existing standard Genworth Canada insured loan to an ALT. A loan, the premium will be the lesser of:
    • The outstanding mortgage balance multiplied by 2.30% + the top-up amount multiplied by the top-up premium rate, or
    • The new loan amount multiplied by the full premium rate

Example for Scenario #3:

Outstanding mortgage balance = $100,000

Top-up mortgage amount = $80,000

New Loan Amount = $180,000 (90% LTV)

 

($100,000 x 2.30%) + ($80,000 x 9.00%) = $9,500

($180,000 x 5.85%) = $10,530

 

Premium Payable is $9,500

When porting with a top-up mortgage amount, the blended amortization option is available

Assumptions/Assignments:

  • Mortgage is assumable subject to meeting lender guidelines.

Eligible Products:

  • Progress Advance Program
  • Purchase Plus Improvement Program
  • Second Mortgage Program

* For specific underwriting guidelines related to the above eligible products, please refer to the applicable product overview

Ineligible Products:

  • Borrowed Down Payment Program
  • Family Plan Program
  • New to Canada Program
  • Investment Property Program
  • Vacation/Secondary Homes Program

 

CANADA GUARANTY   Self-Employed 

The Low Doc Advantage is designed for borrowers who are self-employed and have established a strong credit profile. This program allows borrowers with limited documentation to obtain mortgage insurance through a simplified process.

Transaction Types

  • Purchase transactions.
  • Purchase Advantage Plus™ eligible.
  • Portable eligible.

Amortization

  • Maximum 25 years.

Credit Score Requirements

  • Strong credit profile required.

Loan-to-Value Criteria

  • Maximum 90% LTV for Purchase: 1-2 units

NOTE: Maximum LTV is subject to adjustments based on local housing market conditions.

Interest Rate Types

  • Fixed, standard variable, capped variable and adjustable rate mortgages permitted.
  • Borrower(s) must qualify at an interest rate that is the greater of the contract mortgage rate or the five-year benchmark rate.

Property Types

  • Maximum property value must be less than $1,000,000.
  • Maximum 2 units, with one unit owner-occupied.
  • Secondary homes are ineligible.
  • Existing resale and new construction.
  • Maximum loan amount in the Greater Toronto Area, Greater Vancouver Area and Greater Calgary Area is $750,000. For all other locations, a maximum loan amount of $600,000 applies. Exceptions will be considered on a case-by-case basis.

Borrower Qualifications

  • Self-employed for a minimum of 2 years.
  • Commission sales income is not eligible under this program.
  • No delinquencies in the past 12 months. No mortgage defaults in the past 5 years or previous bankruptcy. No income tax arrears.
  • Self-employed borrowers must be the primary business owner.
  • Minimum 10% down payment, of which 5% must come from borrower’s own resources. Remainder may be gifted from an immediate family member. No borrowed down payments permitted.
  • All applicants used to qualify must occupy the property. For 2-unit properties, 1 unit must be owner-occupied.
  • Maximum debt service ratios: GDS 39% / TDS 44%

Borrower Income Requirements

Canada Guaranty recognizes that a self-employed borrower’s income from their Notice of Assessment does not always represent the actual income available for mortgage repayment. Canada Guaranty supports assessing the reasonability of the application income by considering the nature and tenure of the business, and factors such as the overall credit profile, financial position and current shelter payment of the borrower(s).

The following income requirements must be met for each self-employed borrower:

  1. REASONABILITY:

The borrower’s income must be reasonable for the nature and tenure of the business, and must align with the credit profile and current financial position of the borrower.

  1. SUBMISSION NOTES:

In order to appropriately assess the reasonability of the borrower’s income, the submission notes must include the following information for each self-employed borrower:

  • The amount of the income confirmed by line 150 on the NOA from the most recent tax year at the time of application.
  • The stated gross revenue of the borrower’s business.
  • The type of business being owned and operated (e.g. landscaping, bookkeeping, etc.).
  • The ownership structure (e.g. sole proprietor) and the percentage of ownership.

NOTE:

  1. Any additional borrower whose income is verified in the standard way does not need to submit the above information to Canada Guaranty.
  2. For higher incomes, additional information and/or documentation may be requested.

Portability Options

  1. Port from Low Doc Advantage to Low Doc Advantage

The premium will be the lesser of:

  • The increase in the loan amount multiplied by the applicable Low Doc top-up premium rate, outlined below.

OR

  • The new loan amount multiplied by the full Low Doc premium rate.
  1. Port from Low Doc Advantage to Standard Canada Guaranty-insured Loan

The premium will be the lesser of:

  • The increase in the loan amount multiplied by our standard top-up premium rates as described in the Portable Advantage™ product sheet.*

OR

  • The new loan amount multiplied by the full standard premium rate.
  1. Port from Standard Canada Guaranty-insured Loan to Low Doc Advantage

The premium will be the lesser of:

  • The outstanding mortgage balance multiplied by 2.30% plus the top-up amount multiplied by the Low Doc top-up premium rate.

OR

  • The new loan amount multiplied by the full Low Doc premium rate.

*Please see the Portable AdvantageTM product sheet for details regarding standard premium rates and the Borrower Loyalty Program.

Documentation Requirements

For each self-employed borrower:

  • Borrower must provide proof of self-employment for a minimum of 2 years.
  • Borrower’s income on a signed mortgage application.
  • Notice of Assessment from the most recent tax year at the time of application must be retained by the lender.

Applicable Premiums

Loan-to-Value Ratio

Single Premium

Top-Up Premium

≤ 65%

1.50%

3.00%

65.01%–75%

2.60%

6.50%

75.01%–80%

3.30%

7.00%

80.01%–85%

3.75%

7.50%

85.01%–90%

5.85%

9.00%

NOTE: Mortgage Insurance premiums are non-refundable.

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