Being your own boss comes with plenty of perks. But when you’re ready to buy a home, you may wonder: Will being self-employed make it harder to get a mortgage?
The short answer is not necessarily.
Self-employed Canadians can absolutely qualify for mortgages. The process may just look a little different because your income doesn’t always fit neatly into the traditional paycheque-and-T4 model.
Here’s what you should know.
What Do Lenders Look For?
When you’re an employee, proving income can be relatively straightforward. A lender may ask for a recent pay stub, employment letter and T4.
When you’re self-employed, lenders typically need a little more information to understand how your income is earned and how consistent it is.
They may look at:
- How long you’ve been self-employed
- Your reported income
- Your business structure
- Your credit history
- Your existing debts
- Your down payment
- The stability of your business
The important thing to remember is that lenders aren’t simply asking, “Are you self-employed?” They’re looking at your overall financial picture.
What Documents Might You Need?
Being organized can make the mortgage process much smoother.
Depending on your situation, you may be asked for:
- Notices of Assessment (NOAs)
- T1 General tax returns
- T2125 forms
- Business financial statements
- Business bank statements
- Proof of income
- Business registration or incorporation documents
You won’t necessarily need every document listed above. Requirements vary depending on your business structure, income and the lender.
Canada.ca notes that self-employed borrowers may be asked for Notices of Assessment from the previous two years, while CMHC outlines several ways self-employed borrowers can demonstrate their business history and income.
What If You Write Off a Lot of Expenses?
This is one of the biggest concerns I hear from business owners.
Claiming legitimate business expenses can reduce the taxable income shown on your tax return. Since that reported income is an important part of mortgage qualification, this can sometimes make things more complicated.
However, some mortgage programs allow certain eligible business expenses to be added back when calculating qualifying income.
For example, CMHC’s Self-Employed program provides specific approaches for eligible deductions when assessing income for certain self-employed borrowers.
So don’t assume that the income on your tax return automatically tells the whole story.
Your individual situation and the lender’s guidelines will determine how your income is treated.
How Long Do You Need to Be Self-Employed?
You may have heard that you need to be self-employed for two years before you can get a mortgage.
While a longer business history can certainly help, it’s not necessarily a hard-and-fast rule for every situation.
CMHC recommends 24 months of business operation or experience in the same line of work for its Self-Employed program, while also outlining factors that can help recently self-employed borrowers, such as previous experience in the same industry, predictable income and strong credit management.
So if you’ve recently become self-employed, don’t automatically assume you can’t qualify.
How Can You Prepare for a Self-Employed Mortgage in Canada?
If buying a home is on your radar, a little preparation can go a long way.
Keep your financial records organized. Have your tax documents, financial statements and other business records easily accessible.
Stay on top of your taxes. Your Notices of Assessment and tax returns can be important parts of your application.
Think before making major financial changes. If you’re planning to buy soon, talk to your mortgage professional before taking on significant new debt or making major changes to how you pay yourself.
Get a mortgage review early. Don’t wait until you’ve found your dream home to figure out whether your income will qualify. Understanding your options ahead of time can make the home-buying process much less stressful.
The Bottom Line
Being self-employed doesn’t automatically mean you can’t get a mortgage. It simply means your application may require a little more documentation and a closer look at how your income is earned.
Whether you’ve been self-employed for years or recently made the leap, it’s worth exploring your options before assuming you won’t qualify.
If you’re considering a self-employed mortgage in Canada, I’d be happy to help you understand what lenders may want to see and what options could be available based on your unique situation.
You don’t have to have everything figured out before you reach out.