Mortgages for Self Employed Canada: The Guide

Mortgages for self employed in Canada are rare as “special” programs, but you still can apply for a traditional mortgage from a bank. It’s not an easy process, but you can significantly increase your chances with some tricks. Here’s how to do it.

What is Self-Employment

First — the legal ground, just to be sure. Self-employment means that someone does their own business, or works for themselves. Agriculture, social assistance, construction, or services — you can be self-employed in any sphere. 

While being your own boss and maintaining a healthier work-life balance are the obvious benefits of self-employment, difficulties in getting a mortgage are certainly a part of the downsides list. 

Why Self Employed Mortgages are Harder to Get

To be clear, your lender couldn’t care less about your job. The only thing that matters for them is the risk of you not paying. Unfortunately, in the eyes of a lender, self-employed Canadians are more risky borrowers than people employed in the private sector or in the government. 

Lenders don’t want this kind of risk. They know about the difficulties in forecasting how your business will develop and whether you’ll be able to pay back your mortgage within a reasonable time period.

What You Need to Get a Self Employed Mortgage in Canada? 

First of all — you need a lot of time for the research. Here’s what you should be ready to do: 

  1. Strengthen your application. In order to make your application appear as a safe one, you’ll need to provide more information. In other words, you’ll have to prove that your business is stable and has potential for growth over the next 3-5 years. It’s not enough to say that you’ve been in business for three years now. You need to show this information on paper — your income tax returns, net worth statements, business plans with specific goals and tasks;
  2. Prepare your documents. The basic documents you’ll need to provide include your personal tax return, financial statements, and any business information such as sales ledgers, profit and loss statements, budgets, and personal credit records;
  3. Apply for a business number. It’s actually easier to get a mortgage for self employed Canadians if they’re incorporated as a company. In fact, the process of getting a business number is so straightforward that it can be done by phone or online at virtually any financial institution;
  4. Apply for a mortgage from more than one lender. As you would expect, lenders have different criteria and different rules of thumb when they assess your application and determine your chances of getting a mortgage approval. 

So far it doesn’t sound that hard, huh? 

Full List of Documents for Self Employed Mortgage in Canada 

Now we get to the paperwork part, and this is where the fun begins. 

  • Business plan. It should be well thought out and dynamic, with goals and tasks in place in order to show growth;
  • 5 years of personal tax returns. The more the better, but definitely at least 5 in total;
  • 3 years of financial statements detailing your business income and expenses (profit and loss statements);
  • 1 year of business credit record. This includes any accounts payable, receivables, loans taken or paid back within the last 12 months. Credit rating won’t matter much if you’re self employed;
  • Business credit record;
  • Business credit score;
  • Personal credit score;
  • At least 4 letters of reference from individuals or companies who can attest to your business or your creditworthiness. The letter should be written as an affidavit (a sworn piece of paper) and notarized;
  • List of all personal property — this includes cars, boats, equipment, and any other physical object owned by you and your spouse. It does NOT include real estate;
  • Personal assets to secure a mortgage in Canada;
  • Loan estimate. This one is tricky: it should be done by your financial advisor, and well before submitting your application to a lender. The estimate should reflect a total pre-tax income of the business, and the amount that needs to be borrowed for a mortgage in Canada. 

Collecting all of it sounds fun, right? We know that it’s not. Unfortunately, you still need to do it. 

The more papers you have to back your words and promises — the more chances of getting a mortgage as a self employed you have. 

What Affects Your Chances of Getting a Mortgage as a Self Employed in Canada?

Aside from the paperwork — there are some more things that the bank will look into. Here they are and how you can affect them:

  1. Credit score. Personal credit history will be a very important factor when you try to get a mortgage as a self employed in Canada. The good news is that you can positively affect your score with some help from your financial advisor. This person needs to have a good understanding of the process and how to do it right, or you’ll end up with no change or even negative change in your score;
  2. Down payment. There’s a pretty good chance that you’ll be asked to pay a bigger down payment than usual. Down payments on a mortgage for the self employed usually start at around 10%. That’s the bare minimum. However, you can save up and take it even higher. 35% down is pretty common;
  3. Interest rate. Most lenders require a higher interest rate for self-employed loan applicants than for those applying as employees. In fact, your interest rate could be as high as 5% more expensive than the standard one. Make sure your hair don’t turn grey when you see it;
  4. Get rid of all the debts. Carrying significant amounts of debt is a critical mistake when looking for a mortgage. Your lender will compare your total debts with your personal income and conclude that there’s a big gap between them. Instead of helping you get a mortgage, the gap will scare the lender away from approving your application. 

In short, to increase your chances of getting a self employed mortgage in Canada, you should: pay all the debts, save money for a bigger down payment, save enough to afford a higher interest rate, and take care of your credit score. 

Alternatives for Self Employed Mortgage

No, this part is not about closing your business and getting a stable boring job at the nearest office cubicle, selling your soul to the corporation. It’s about private lenders. 

Private lenders are people who care about less greedy banks and have decided to take matters into their own hands. They’re the ones that will help you get a mortgage for self employed with no detailed checks:

  1. No credit score check;
  2. No income verification;
  3. Easier approval process than regular banks;
  4. Higher chances of getting a self employed mortgage with bad credit or low income. 

There are some downsides as well, though: 

  1. Higher interest rates;
  2. Possible extra fees;
  3. Less security in the process (read all, ALL the fine print in the papers you’ll sign). 

A private lender is not a definitive solution, it’s just another way of getting a mortgage as a self employed, with its own pros and cons. However, if you get turned down by the bank, or two, or 5 — you kind of have no other options. 

Mortgages For Self Employed Canada: The Bottom Line

Mortgages for self-employed people are still a rarity in Canada. However, it’s becoming more and more popular with each passing day. You should definitely at least TRY to apply for one if: 

  • You have a positive credit history;
  • You have a decent income;
  • You’ve been consistently paying your debts and other bills on time;
  • Your financial advisor knows what he/she is doing and can write all the papers needed to help you get a mortgage. 

Even though it’s quite hard — it IS possible. At least, in theory. And as with everything in self-employment, you’re the one responsible for your success.

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