These days, as a result of the rules brought in over the past few years by the regulator of the country’s chartered banks, borrowing money to buy a home has become much more difficult for the 2.75 million Canadians who are self-employed—a group that according to Stats Canada has a higher median net worth than paid employees.
In the past, self-employed individuals with a 680+ credit score and their word they were earning enough from their business, could secure a mortgage with little or no documentation.
Today these same individuals are shocked to find they are no longer ‘approvable,’ even with a perfect repayment record of their existing mortgage.
The guideline B-20, which required federally regulated banks to tighten their approval process, has had a negative impact on self-employed individuals.
If you are self-employed or a business owner, you may be surprised to find that getting a mortgage without the conventional documents is not a simple process. The self-employed typically lower their taxable income by maximizing business expenses and personal deductions resulting in a discrepancy between what shows on their tax return and how much they actually do earn.These individuals have obtained their mortgage through what is referred to as “stated income” applications which require an impeccable credit history and a signed income declaration along with sound proof of the self-employment. Today they can still apply for a stated income mortgage but under B-20 they can only borrow up to 65 per cent of the value without the requirement of default insurance from Genworth, CMHC or Canada Guaranty. The criteria for qualification has increased and each insurers has different criteria.
So, what should you do if you are self-employed and want to buy a home, refinance your existing mortgage or switch lenders? Begin by having copies of your CRA Notice of Assessments for the last two or three years. Good credit is a must. Ensure your tax returns are filed on time and pay the taxes owing to create a positive picture of your finances.
You will be required to provide confirmation of your business. This can be as easy as providing a business license. A mortgage for a self-employed business owner “stating income” may, in some cases, result in a higher mortgage rate and higher mortgage insurance premiums.
If you are able to qualify with your self-employed earnings and there are ways a professional can assist with this, your rate will reflect the best rates offered.
Mortgage professionals assist clients every day with their mortgage requirements. If you are unsure whether you can prove your income - talk to one.