Self Employed

C anada’s workforce is changing! Self-employed people represent a ever-growing proportion of the Canadian workforce. To help accommodate for this shift in population, mortgage lenders and insurers have released product enhancements in order to respond to this reality by making it easier for more self-employed borrowers to obtain mortgage loan insurance. These programs not only allow for lower required down payments, but also allow self-employed borrowers to benefit from competitive interest rates.

The more “traditional” circumstances where borrowers are self-employed or commissioned salespersons who can provide traditional documentation to reinforce their income levels have been and will continue to be available. These newer programs help even more self-employed borrowers realize their dream of home ownership by making mortgage loan insurance available for borrowers who have difficulty obtaining third-party validation of their income through traditional forms of documentation.

It is important to note that these programs are limited to self-employed borrowers who have a strong history of managing their debts well (high beacon scores) and who have worked a minimum of two years in the same type of work, either as an employee or self-employed.

The most difficult challenge today aside from credit history is historically proving income. The economy of today promotes to a certain degree the “cash” transaction. Alternatively, accounting practices generally tend towards minimal personal income tax paid by the proprietor(s). Thus the “self-employed” may be in a better position from the outside looking in, however financial institutions generally look for stability and a clients “proven” history to pay. The options in lenders fall into 2 categories; Equity (appraisal value) or Income/Credit/Debt Servicing.

Equity Lenders

T he generalized philosophy of an equity lender is the “Appraised Value” of a “Marketable Property”. The power and focus of these lenders is primarily on the “bricks and mortar value” with secondary consideration given to ability to pay. Let this not be confused with “not having to pay”. Equity lenders are in the business of financial loans secured by mortgages. They expect to get paid as does any other business, and if a mortgage is in default they are quick to react. Equity lenders can be a powerful ally so please read on.

A Self-Declared income letter is all that is required to be filled out by the individuals on title. The traditional Canada Customs and Revenue Agency (CCRA) Notice of Assessments are not necessarily requested.

Interest rates will be reflective of ones Credit History (Equifax: Beacon Score) and the Term of the mortgage. Traditional Banks will usually offer slightly better rates than an Equity Lender, however the Equity lender funds mortgages where Traditional Banks usually/traditionally say NO.

Mortgage amounts may generally be calculated at 75% of the Purchase Price or Appraised Value whichever is “LOWER”. In the case of a refinance the rule will of course be 75% of the appraised value. Make no mistake that these Equity Lenders have their own designated appraisers. An appraisal by anyone else will just be a waste of your money.

Most “No Income Verification Mortgages” Require Revenue Canada Notice Of Assessment To Confirm That You Don’t Owe Any Income Taxes!

Did you know.

… that in January 2005 CMHC improved access to the full spectrum of the homeowner mortgage insurance products for self-employed Canadians?

  • To determine income for a self-employed borrower, a simple gross up of the Total Income (Line 150) on their Canada Revenue Agency (CRA) Notice of Assessment (NOA) by 15% can be used.
  • Borrowers who have eligible deductions in excess of 15% of the income on their NOA may opt to provide audited or accountant prepared financial statements to support a higher income level, in lieu of the standard 15% gross up.
  • Self-employed applicants are normally required to demonstrate at least two full years of operation of their business.
  • If a borrower has been working for an extended period of time and recently became self-employed in the same field, the two-year self-employment requirement does not apply.
  • Minimum time of business operation can be documented through income tax returns supported by the borrower’s NOA, business credit reports, GST returns, active business bank accounts, audited or accountant prepared financial statements.

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