Obtaining a Mortgage When You’re Self Employed

There is a persistent myth that getting a mortgage as a business owner is next to impossible. “Make sure you’ve got plenty of cash!”, they say, “you’ll never qualify without at least 25% down”, they cry. Is it true- do you really have to jump through hoops to qualify for a mortgage as a small business owner?

The answer to that question depends on three main factors: your business, your personal financial situation, and your overall creditworthiness.

The Typical Mortgage Approval Process

For most people, the process of obtaining a mortgage is fairly straightforward: submit your financial information, provide recent pay stubs (and potentially a letter of employment), and submit at least 5% of the purchase value as a down payment.

This process is important in ensuring that only people that are financially capable of servicing a mortgage are able to acquire one. Having strict – but achievable – standards for qualification is a big part of what kept the Canadian banks afloat during the 2008 financial crisis.

What You’ll Need as a Business Owner

Business owners are subject to a similar process, though you’ll need a bit more documentation to demonstrate to a mortgage lender that you are a suitable candidate.

Specifically, you’ll need:

  • Two years T1 generals – This is what your accountant is filing (aka, your tax return). This will show how you are paid (salary, dividend, etc.) and where your income was derived from.
  • Two years corporate financials – This provides perspective on how your company is doing, expenses, and overall viability as a business.
  • Notice of assessments – Most lenders will ask to see your NOA for the last two years. They’re looking to see your income as reported to the government (earnings that may be realized but unreported will not be taken into consideration). The NOA’s will also show if there is an outstanding balance owed to the CRA (that must be paid prior to possession).
  • Copies of your contracts – If you’re a contractor with a couple of larger contracts, the lenders may ask to see copies of these contracts. This demonstrates your income potential (think of this step as simply providing your letter of employment)
  • Documentation validating your position with your business – It’s one thing to say you’re a business owner, and another thing entirely to prove it. Chances are that your lender is going to want to see verification that you hold the position with your business that you say you do (think of this as the letter of employment, part two).

If you’ve been a business owner for a while and can provide two years of verifiable income, the process should be quite straight forward. If not, we can look into other options that consider your down payment, business history, and some other intangibles that are best discussed in person.

What if You’re a Contractor?

Contractors are increasingly common (in Calgary especially) and are a unique case. If you have moved from a salaried position to a contract, and the contract is for similar compensation and responsibilities as your salaried position, the lender will likely only require proof of verifiable income (very similar to a typical salaried employee).

If your compensation is dramatically different (say your income used to be $80,000 but is now $120,000 under contract), the lender will look at the $80,000 when basing its decisions. Once you have two years of financials under your new rate, that will be the number the lender uses when considering your income.

When the Above Information Doesn’t Quite Cut it

It is not uncommon for new business owners or contractors to want to acquire a mortgage. However, the lack of history to the business complicates the process somewhat. Remember, a lender undergoes this qualification process with you to determine two things: first, can you actually afford the mortgage that you’re seeking; second, what is the risk of you becoming delinquent on payments or defaulting entirely?

Unfortunately, no matter how lucrative and profitable your new business may be, the lack of history makes a lender a little leery.

Despite this temporarily working against you, you can still qualify for a mortgage… but you’ll need a few extra things.

How to Make the Application Process Go Smoother

So, you’re a new business owner and things are looking positive- great! You’ve got your eye on a great new infill in the Beltline and you’re ready to make the move. What now? Let’s stack the odds in your favour…

  • Assets – If you have assets – investments, vehicles, cash, etc. – let’s bring them to the table. The lender isn’t going to ask you to sell your car, but knowing that you have a paid off vehicle or two (and that they’re worth something) will help assuage their concerns regarding mortgage repayment.
  • Down payment – If you’ve got a new business and a small down payment, you’re going to find it tough to get a mortgage at a reasonable rate. We can stack the odds in your favour by going to the lender with a large down payment. If you’re able to put 20% down (or more), the odds of you getting a favorable mortgage rate increase significantly.
  • Other sources of income – If you have income coming in from secondary sources, such as investments, commission, or other sources, bringing those to the table will go a long way.

Stated Income vs. Verifiable Income

If you are putting at least 10% down on the purchase value, the lender may be willing to base its decisions on your stated income (versus your verifiable income). You will be subject to higher CMHC fees but should otherwise be able to obtain approval for your mortgage.

We will walk you through this further, if needed, when we meet to discuss your options.

A Good Mortgage Broker Makes This Process a Lot Easier

It may seem passe to plug our brokerage (hey, it is our blog), but it’s true: a good mortgage broker, like us, is much more likely to get you approved for a mortgage compared to working with a bank directly. Remember, a mortgage broker has access to an entire suite of mortgage products offered by a variety of lenders (including all of Canada’s major banks).

For a new business owner, the best step they can take is to work with a mortgage broker- let the professional jump through the hoops and let you know what you need to do next.