Self-employed individuals in Canada face unique challenges when it comes to securing a mortgage. Unlike traditional employees, they often have fluctuating income and may not have a steady employment history.  

Eligibility Criteria

To qualify for a self-employed mortgage in Canada, borrowers must meet several eligibility criteria. These include a good credit score, proof of business ownership, and income verification. Lenders will also look at debt-to-income ratio and the length of time the borrower has been self-employed. 

Credit Score: A good credit score is essential when applying for a mortgage. Lenders will look at the borrower’s credit history to determine their ability to make payments on time. A score of 680 or higher is generally required for a self-employed mortgage. 

Down Payment: Self-employed individuals may need to put down a larger down payment than traditional employees. A down payment of 20% or more is recommended to avoid having to pay for mortgage default insurance but not necessary, as there are some insured mortgage products available for you. 

Income Verification: Self-employed borrowers must provide proof of income to lenders. This can be challenging as income may vary from month to month or year to year. Lenders may require several years of tax returns and financial statements to assess income stability. 

Documentation Requirements

Self-employed borrowers will need to provide detailed documentation to lenders to prove their income and business ownership. This may include tax returns, business financial statements, bank statements and detailed information about the operations of the business. It is essential to keep accurate and up-to-date financial records to make the process smoother. 

Tax Returns: Lenders will require several years of personal and business income tax returns to verify income stability. The most recent Notice of Assessment (NOA) will also be required. 

Financial Statements: Self-employed borrowers will need to provide financial statements, including balance sheets and income statements, to show the financial health of their business. 

Business Licenses: Proof of business ownership, such as a business license or articles of incorporation, will be required. 

Tips for Successful Application

Self-employed individuals looking to apply for a mortgage can take several steps to improve their chances of being approved. 

Improve Credit Score: Improving credit score is crucial when applying for a mortgage. This can be done by paying bills on time, reducing debt, and keeping credit card balances low. 

Save for a Down Payment: Self-employed borrowers may need to put down a larger down payment than traditional employees. Saving for a down payment of 20% or more is recommended to avoid having to pay for mortgage default insurance. 

Reduce Debt: Lenders will look at debt-to-income ratio when assessing eligibility for a mortgage. Reducing debt, such as credit card balances, can improve the chances of being approved. 

Alternative Mortgage Options

Self-employed individuals may have difficulty meeting the eligibility criteria for a traditional mortgage. However, there are alternative mortgage options available. 

Stated Income Mortgages: Stated income mortgages allow borrowers to state their income without providing detailed documentation. However, interest rates may be higher, and down payments may be larger. 

Asset-Based Mortgages: Asset-based mortgages allow borrowers to use assets, such as investments or real estate, as collateral for a mortgage. This can be a good option for self-employed individuals with significant assets but limited income.

Securing a self-employed mortgage in Canada can be challenging, but it is not impossible. By understanding the eligibility criteria, gathering the necessary documentation, and seeking professional guidance, self-employed individuals can achieve their dream of homeownership. It is essential to be prepared and work with a mortgage broker who understands the unique needs of self-employed borrowers. With the right approach, self-employed individuals can successfully apply for a mortgage in Canada.