Being self-employed offers many benefits and challenges, particularly when it comes to buying a home. With a self-employed mortgage, however, you can meet these challenges. This guide is designed to explain self-employed mortgages and to answer this question that you may have often asked yourself: Can I get a mortgage if I’m self-employed? Take it into account before you use the other features of our top-rated site to access an application for a self-employed mortgage.
Self-Employed people face some unique challenges when it comes to getting a mortgage. Lenders generally see the self-employed as riskier prospects for loans, which makes them hesitant to offer mortgages with the same terms that they offer to those who work for others. The main reason for this has to do with the uncertainty of a self-employed person’s income. Because the fortunes of small businesses are even more tied to the economy’s ups and downs than the fortunes of large corporations, self-employed people may pay themselves much less in one year than they do in another. Individuals who work for a company owned by someone else, on the other hand, have a set salary that remains the same as long as the person is employed by that company or the employee and employer agree to a change in wages. Due to the wider fluctuations in income for self-employed people, lenders are more reluctant to lend these individuals money for fear that they will not have enough income in a given year to make their mortgage payments.
Fortunately, most lenders in Canada have programs that take this risk into account and enable them to offer mortgages to self-employed people while avoiding great losses. The most common of these programs is the self-employed mortgage. Self-employed mortgages are virtually identical to traditional mortgages offered to those who work for others except that there are a few extra requirements to qualify for a self-employed mortgage.
To understand the additional requirements for a self-employed mortgage, it is helpful to know the differences between self-employed mortgages and traditional mortgages in Canada. Here are a few of them:
• A self-employed mortgage cannot usually be obtained if you do not have a third-party verified income and your down payment is less than 10 percent of your home’s purchase price (when purchasing a home).
• A self-employed mortgage cannot usually be obtained if you want to refinance more than 80 percent of your home’s value.
• A self-employed mortgage requires more documentation for approval than a traditional mortgage
• The allowable debt service ratio for a self-employed mortgage is usually lower than the allowable debt service ratio for a traditional mortgage.
• CMHC mortgage insurance costs up to 3.15 percentage points more for a self-employed mortgage than for a traditional mortgage depending on the size of your down payment and your amortization period.
If you are self-employed and want to get a self-employed mortgage, you must first contact a bank or broker to apply for your loan. This can be done easily on this website by visiting the mortgage rates page and clicking on the interest rate you prefer.
When you apply for a self-employed mortgage, your lender or broker will ask for some documentation to help it determine whether you should be approved for a loan. These documents are usually required for self-employed mortgage approval:
• driver’s license or other form of personal identification to prove your identity
• two-years’ worth of business financial statements to verify business strength and income potential (if you have incorporated your company)
• a Notice of Assessment that covers the preceding two years to verify the accuracy of your reported income and tax payments
• a business license to prove your company exists
• bank statements that indicate your assets to verify your financial health
• proof that you actually have a down payment for your home purchase (a gift letter or three-months’ worth of business account statements)
• (in some cases) three-years’ worth of income tax returns
• (in some cases) a letter from a previous employer or other documentation that proves you have worked in your field for at least two years
Because self-employed mortgages are riskier for lenders to fund, there are more stringent requirements for CMHC mortgage insurance. In other words, the Canada Mortgage and Housing Corporation (CMHC) charges people with a self-employed mortgage and no third-party income verification more than they do people who have a traditional mortgage. Furthermore, there are certain limits related to the amount of the down payment and amortization period for a self-employed mortgage that traditional mortgage holders do not face.
For example, you cannot get an insured self-employed mortgage with an amortization period of greater than 25 years if you do not put a 20 percent down payment on your home. Furthermore, you cannot get an insured self-employed mortgage at all when you have no third-party verification of income unless you can put at least 10 percent down.
As with a traditional mortgage, the amount of mortgage insurance that you are charged on a self-employed mortgage depends on your down payment and amortization period. Here are the basic guidelines:
Self-Employed Mortgage Charges for a Home Purchase if You Have a Third-Party Verified Income and a 25-Year Amortization Period
• 2.9 percent for loans with a non-traditional-source down payment of 5 percent
• 2.75 percent for loans with a traditional–source down payment of 5 percent
• 2 percent for loans with a down payment of >5–10 percent
• 1.75 percent for loans with a down payment of >10–15 percent
• 1 percent for loans with a down payment of >15–20 percent
• 0.65 percent for loans with a down payment of >20–25 percent
• 0.5 percent for loans with a down payment of >25–35 percent
Self-Employed Mortgage Charges for a Home Refinance if You Have a Third-Party Verified Income and a 25-Year Amortization Period
• 2.75 percent for loans with a down payment of >15–20 percent
• 2.25 percent for loans with a down payment of >20–25 percent
• 0.5 percent for loans with a down payment of >25–35 percent
Self-Employed Mortgage Charges for a Home Purchase with a 25-year Amortization Period if You Do not Have a Third-Party Verified Income
• 4.75 percent for loans with a down payment of 10 percent
• 2.9 percent for loans with a down payment of >10–15 percent
• 1.64 percent for loans with a down payment of >15–20 percent
• 1 percent for loans with a down payment of >20–25 percent
• 0.8 percent for loans with a down payment of >25–35 percent
Self-Employed Mortgage Charges for a Home Refinance with a 25-Year Amortization Period if You Do not Have a Third-Party Verified Income
• 3.85 percent for loans with a down payment of >15–20 percent
• 2.6 percent for loans with a down payment of >20–25 percent
• 1.5 percent for loans with a down payment of >25–35 percent
On all of the mortgages above, add 0.20 percent for each five-year period of amortization in excess of 25 years (applies only to loans where you can put 20 percent down).
To calculate your CMHC insurance premium, take the home purchase price, subtract your down payment, and then multiply that amount by the insurance premium percentage tied to the down payment percentage as listed above.
For example: Consider a $300,000 home purchase with a down payment of $60,000 and a third-party verified income. According to the chart above, your insurance premium is 1 percent because you have a down payment that is 20 percent of the home purchase price. Subtract $60,000 from $300,000 to get a total loan amount of $240,000. Multiply the loan amount by 1 percent to get a total of $2,400, which is what you will have to pay for CMHC insurance on your self-employed mortgage.
Although you face greater CMHC insurance expenses and other mortgage hurdles than individuals who are not self-employed, there are still some great tax benefits to being self-employed and working from home. To conclude our guide to mortgage and housing costs for self-employed individuals, the following is a list of some of the major tax write-offs you can enjoy when you work from the home you bought with a self-employed mortgage. All you need to take advantage of these write-offs is to fill out the T2125 form from the Canada Revenue Agency and file it with your income tax return. Do not put off taking advantage of any of these write-offs, for each one you take represents more money in your pocket and less money paid in taxes.
Potential Tax Write-Offs for Self-Employed People Who Work from Home
• prorated portions of your utilities, maintenance, home insurance, repairs, property taxes and mortgage interest that reflect how much of these items are used for the support of your business*
• capital depreciation of your home
• the entire amount of utilities that are devoted specifically to your business (for example, a business phone line or Internet connection)
*To calculate your deduction, estimate the amount of space that your home office occupies in your home and multiply deductible expenses by that amount. For example, if your office occupies 10 percent of your home, you can reasonably deduct 10 percent of your total utilities, maintenance costs, home-loan interest and other bills.