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According to Statistics Canada, the number of self employed Canadians at the end of 2015 was 2.76 million -more than 15% of the total workforce. While this figure is rapidly growing (by half a million each year to be precise), many lenders still haven’t outlined a clear and easy way for the self-employed to obtain a mortgage, or to secure the best mortgage rates. In fact, since 2014, Guideline B-12 has made it increasingly difficult, by requiring federally regulated banks to look more closely at the income of self employed applicants.
What classifies as self-employment?
The self -employed title covers a large range of situations, from freelancers to people running their own registered business, to entrepreneurs, farmers, commission-based workers, and shareholders of joint ventures or corporations.
What does the Guideline B-12 outline?
A FRMI – federally regulated mortgage insurer, must outline the steps for self-employed borrowers to obtain income verification (for example, a notice of assessment, declarations of income, and tax returns.) When verifying this documentation, lenders must check that:
- The income declaration is certified by an independent source;
- This source is difficult to falsify;
- The verification source directly addresses the amount of the declared income; and
- The income verification information and documentation does not contradict other information provided by the borrower in the underwriting process.
Guideline B-21 also stipulates that the federally chartered bank can only lend 65% of the purchase value of the property to the self-employed, whereas 75% was allowed in 2013. Credit unions may lend up to 80% without the need for default insurance, but at a higher interest rate.
What documents will lenders require?
Lenders assess self-employed applicants with the same three factors as others mortgage applications: Income, net worth and credit score.Employment is generally proved with a T4 slip, which is not available to self employed workers, making it harder to verify how much you earn. As a replacement, self-employed workers will typically obtain their mortgage through stated income applications, in which income is validated with a signed declaration backed up with the following documents:
- Your income tax returns and notices of assessment for the previous two to three years. A large positive income is not necessary, but try not to show a loss for the previous two years.
- A copy of your business registration or articles of incorporation showing you’re licensed.
- Financial statements for your business. You have to ready to explain your business—your income, expenses, and when you’ll break even.
- Your NOA from the Canada Revenue Agency to confirm you have no tax liability.
- Proof that your HST and/or GST is paid in full.
- Proof that you are a principal owner in the business.
- Client contracts showing expected revenue for the coming years.
- Proof that you have a down payment available of at least 15% , as well as the funds for other closing costs.
Aside from your stated income, lenders will look at debt service ration to calculate whether you can afford to pay the monthly carrying costs of home-ownership.
Finally, prepare proof of tax deductions to your income, such as transportation, marketing costs, and office rental costs. Certain lenders will allow you to add back some tax deductions to your income, while other lenders will consider the total amount deducted and agree to add a percentage to your income to account for business expenses.
Having a co-signer may come in handy…
In some cases, having a salaried spouse, family member or partner with a stable income co-sign on your mortgage may help instil confidence in lenders. When selecting a co-signer, keep in mind that they will receive title ownership to the property.