How to Get a Mortgage if You Are Self-Employed?
We often wonder why it’s so problematic for the rising numbers of self-employed persons in Canada to get a mortgage. Almost 20 percent of all persons earning an income are self-employed (some part-time). The first problem is, it’s sometimes difficult to demonstrate where the income is coming from. Many lenders also don’t seem to know that the owners of businesses are driven to expense as much of their income as possible so as to reduce their taxes due.
Most lenders want personal tax Notices of Assessment for the last 2-3 years to form part of the application if a business owner or freelancer wishes to get a self-employed mortgage. Those who cannot supply proof of income must offer a down payment of at least 10 percent and should have a decent credit history. Those who are able to provide it can usually access the same mortgage rates and products as conventional borrowers.
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Some of the additional documentation (apart from the Notices of Assessment) that lenders usually require for self-employed mortgage applications includes:
- Proof that harmonized sales tax (HST) and goods and services tax (GST) are fully paid off
- Financial statements for your business
- Your business and personal credit scores
- Contracts showing anticipated income for the upcoming years
- A duplicate of your Article of Incorporation or your GST licence showing you’re certified
- Proof that you have a principal interest in the business
- Proof that you funded your down payment yourself
Self-Employed Mortgage Default Insurance Rates
Mortgage default insurance functions in precisely the same way for a mortgagee with his or her own business as it does for traditional mortgagees: once the mortgagee can prove his or her income through personal tax Notices of Assessment: a premium must be paid for down payments between 5 and 19.99 percent, and no insurance is required for mortgages with down payments of 20 percent or more. The lender then adds the premium to the mortgage and it is paid off together with the loan.
Rates for Self-Employed Mortgagees With Proof of Income
The three providers of mortgage default insurance, Canada Guaranty, Genworth Canada, and Canada Mortgage and Housing Corporation (CMHC) offer similar rates, once you can deliver adequate proof of income: 4 percent for a down payment between 5 percent and 9.99 percent, 3.10 percent for a down payment between 10 percent and 14.99 percent, and 2.80 percent for down payments between 15 percent and 19.99 percent.
Rates for Self-Employed Mortgagees Without Proof of Income
You must make a down payment of at least 10 percent if you are unable to show adequate proof of income, and you must locate a lender who uses Canada Guaranty or Genworth since these are the only two providers offering mortgage default insurance for files with just stated income. For down payments of 10 percent to 14.99 percent the rate is 5,45 percent, for down payments of 15 percent to 19.99 percent, it’s 3.35 percent, and for 20 percent or higher, the rate moves down to 1.9 percent.
Should Self-Employed Applicants Use Mortgage Brokers?
This is one situation where employing a broker has clear benefits, since it is hard to discern which lenders have better terms for self-employed persons, or which ones focus on self-employed mortgages in the first place. Mortgage brokers can access numerous lenders and most of them possess comprehensive information about the market. Your broker can consequently link you with the lender that is most appropriate for your current condition.