While we don’t know the exact number of Canadians who are self-employed at any given time, we do know that at the end of 2017, almost 15% were self-employed. That’s almost 2.8 million Canadians who, should they want to buy a home, need to qualify for a mortgage. Qualifying for a mortgage is a whole different ball game if you’re self-employed. That said, Statistics Canada data tells us that this group has a higher median income and net worth than paid employees. If you’re one of the many self-employed Canadians, there are a few things to keep in mind before applying to buy your dream home. And do consider the pro’s and con’s of mortgages before making your decision.

Prepare your documents

To understand how a mortgage works, you need to understand what motivates lenders; in basic terms, lenders want to ensure that you can pay your loan back. To do this, they start by assessing three factors; income, net worth and credit score. As a self-employed Canadian, you have a different way of declaring your earnings than a salaried employee, or someone who is employed full-time. Because of this, oftentimes your declared net income is not always large enough to qualify for a mortgage. Most lenders require personal Tax Notices of Assessment from the past 2-3 years included with your application. You’ll also need various documents such as proof you are the principal owner in the business, financial statements for your business, proof that you’ve paid your HST and/or GST in full, contracts showing expected revenue for the coming years, and a few more things. Keep in mind that as a rule of thumb, for self-employed individuals, lenders will only consider net income (not gross earnings) as a yardstick--remember those tax write offs? Those will come into play here.

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Understand mortgage default insurance

If you can prove your income through your personal Tax Notices of Assessment, mortgage default insurance works the same way as it does for a traditional mortgage; you have to pay a premium if you’re putting down between 5-19.9%. As with all mortgages, if you don’t have a 20% downpayment, you’re required to have mortgage insurance. If you don’t have proof of income and have less than a 10% downpayment, your premium rates will be even higher. Find out more about mortgage default insurance rates for the self-employed. That said, for self-employed mortgages you are often required to have a downpayment of at least 15%, so be sure to build that into your budget. And don’t forget that you can access things like your RRSP and utilize the first time home buyers plan to help fund your purchase.

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Lenders offer specific “self-employed mortgages”

The key here? Use a mortgage broker. It’s difficult to know which lenders specialize in self-employed mortgages or have favourable terms for the self-employed. Because mortgage brokers have access to multiple lenders and are incredibly knowledgeable about the mortgage market, they can help you navigate it as a self-employed Canadian. The bottom line is that qualifying for a mortgage is not a walk in the park, there are restrictions and as someone who is self-employed, you have to think about whether you’re ready to buy. Are you in a position to take on a large amount of debt? If you’re not sure whether now is the right time to take on the debt of a mortgage, you can look into different options. At Key, we’re creating a model where you can own real estate without needing to qualify for a mortgage. Learn more about or model of homeownership and try our home equity calculator.

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