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.

… 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.

Want to learn more?

Visit CMHC website at www.cmhc.ca