At one time, self-employed home buyers had to prove their income to qualify for a mortgage, but with one in six Canadians working for themselves in today’s economy, lenders have adjusted their criteria.
“Lots of self-employed people qualify for a mortgage just like everyone else,” says David Stafford, managing director of real estate secured lending at Scotiabank. “But sometimes, income is harder to verify. If it’s not verifiable by the usual means, we have a program to address that.”
Usually, income verification means producing your last two Notices of Assessment from the Canada Revenue Agency. But some self-employed business owners may not show enough income because of expenses written off against the business.
That’s when the mortgage program for self-employed home buyers applies. Scotiabank may ask for a full appraisal on the property and set tighter credit score limits and a reduced loan-to-value ratio. This means lower limits of 65 to 75 per cent on the loan maximum in relation to the property value, compared to the usual 80 per cent for a conventional mortgage, depending on the type of self-employment and credit score.
To qualify for a high-ratio mortgage and required mortgage insurance, the self-employed homeowner in this case would need to make a minimum 10 per cent down payment instead of the usual five per cent.
Once they have qualified under the mortgage for self-employment criteria, however, the self-employed home buyer gets the same interest rates and may choose from the same broad range of terms, amortization periods and other features.
“It really comes down to verifiable income, and we can only verify accounting income and not cash-flow income,” Mr. Stafford says. “But I don’t think anyone should worry about qualifying for a mortgage simply because they’re self-employed. They just might have to do so on different terms.”
If you are self-employed, you may have to take some measures to polish up your financial image for your mortgage lender.
- Do credit score maintenance. You should always pay attention to your credit score, but when you are asking someone to lend you a lot of money, it’s even more important. Check your credit rating with Equifax and TransUnion Canada, the two main credit rating agencies. The reports are free if you are willing to wait two or three weeks for them to come in the mail. Then take care of any outstanding debts that you see and correct any errors, which are not uncommon.
- Prepare documentation of your business. Gather your last two or three Notices of Assessment. Be prepared to show financial statements that demonstrate your business has been operating for at least two years.