Obtaining a mortgage as a self-employed borrower in Canada can be a challenging task, but it is not impossible. Many lenders have stricter qualifications for self-employed borrowers, and the process can be more complex than for those who are employed by a company. However, with the right preparation and understanding of the process, you can secure a mortgage and achieve your dream of homeownership.
What do I need to provide for proof of income as a self employed borrower?
The first step in obtaining a mortgage as a self-employed borrower is to gather all of your financial documentation. Lenders will typically require at least two years of financial statements, including your income tax returns, balance sheets, and profit and loss statements. It is important to ensure that all of your financial documentation is accurate and up-to-date, as lenders will use this information to determine your ability to repay the mortgage.
For alternative lenders the income qualification can be a little less tedious. These lenders can often work with a shorter time frame of documents and can often annualize your expected earnings based on a few months of bank statements. This is a huge plus for anyone that may work in seasonal industries.
Another important factor that lenders will consider is your credit score. Having a good credit score will make it more likely that you will be approved for a mortgage, and it will also make it possible to secure a better interest rate. If your credit score is not as strong as you would like, it may be worth taking steps to improve it before applying for a mortgage. This could include paying off any outstanding debts, correcting any errors on your credit report, or working with a credit counseling service.
In addition to your credit score and financial documentation, lenders will also look at other factors when determining your eligibility for a mortgage. These could include your debt-to-income ratio, your employment history, and your assets and liabilities. It is important to be prepared to provide information on all of these factors when applying for a mortgage.
Are there alternative options available?
If you are self-employed and are having difficulty obtaining a mortgage, there are other options available to you. One option is to apply for a mortgage through a private lender. Private lenders may be more willing to work with self-employed borrowers, and they may be more flexible in their requirements. Another option is to seek out government-backed mortgage programs. These programs are designed to help self-employed borrowers and other borrowers who may have difficulty qualifying for a traditional mortgage.
Obtaining a mortgage as a self-employed borrower in Canada can be a challenging task, but it is not impossible. With the right preparation and understanding of the process, you can secure a mortgage and achieve your dream of homeownership. Gathering all of your financial documentation, ensuring that your credit score is as strong as possible, and being prepared to provide information on all relevant factors will increase your chances of success. Additionally, it is worth considering alternative options such as applying for a mortgage through a private lender or seeking out government-backed mortgage programs. At Pekoe Mortgages, we are dedicated to helping self-employed borrowers navigate the mortgage process and achieve their homeownership goals.
There are several government-backed mortgage programs available for self-employed borrowers in Canada. Some examples include:
The Self-Employed Mortgage Program: This program is offered by the Canadian government and is specifically designed for self-employed borrowers. It allows self-employed borrowers to qualify for a mortgage using their average income for the past two years, instead of just their current income.
The Home Buyers’ Plan: This program allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to use towards the purchase of their first home.
The First-Time Home Buyer Incentive: This program is aimed at helping first-time home buyers purchase their first home with a smaller down payment. The program provides a shared equity mortgage with the Government of Canada.
Insured Mortgage Purchase Program (IMPP):This program allows a Crown corporation, Canada Mortgage and Housing Corporation (CMHC) to purchase insured mortgages from financial institutions, which will help to stabilize the housing market and support access to mortgage financing for borrowers.
- Low Doc Program: other insurers will offer programs to self employed borrowers with limited history of being in business. Contact us for more details on this program
A stated income mortgage can be a good option for self-employed borrowers who have a hard time proving their income, or for those who have a fluctuating income that doesn’t reflect their true earning potential. It is also a good option for those who want to keep their financial information private.
A low-doc mortgage (short for low documentation) is a type of mortgage that requires less documentation from the borrower than a traditional mortgage.
Low-doc mortgages are considered to be higher risk for lenders than traditional mortgages, so they may have stricter terms and conditions. For example, they may require a higher down payment, a higher credit score, or a higher interest rate.
It depends on the type of mortgage you are requiring. If it’s an insured purchase (less than 20% down) then your rates would be comparable to any other lenders rates, however your mortgage insurance premium may be higher. For conventional loans, or refinancing the lenders often see low doc mortgages as higher risk and this is often reflected in higher rates. You either have to declare more income and pay taxes, or pay a slightly higher interest rate. Many self employed borrowers opt for the latter.
Have more questions about getting a mortgage as a small business owner? Reach out we're happy to help out.
