How to get a Self-Employed Mortgage in Canada
Are you someone who is self-employed and is having issues with getting a mortgage?
This might be because your accountant suggested you write off as many expenses as possible to reduce your personal income taxes. That's good for your tax bill, but not so good for your mortgage opportunities.
There are many nuances to succeeding with your mortgage as an entrepreneur, but in this article, we're going to cover the first major considerations, including what trade-offs you need to balance when it comes to paying fewer taxes, and also how you can qualify for the mortgage you need.
Find out how much mortgage you can afford today
Thanks to the takeoff of remote work (along with platforms like Shopify, Amazon, and Etsy), 15% of Canadians are now self-employed. However, if you ever try to explain to a bank why your business has a great track record, lots of monthly active users, and a big promise to do well, you'll probably be disappointed with how they look at your business.
That being the case, if you want an estimate of how much you qualify for today, this is what you have to do:
Take the average of what you reported on Line 150 of your personal income taxes for this year and last year. For example, let's say that is equal to $175,000.
A simple rule of thumb to quickly see how much mortgage you can qualify for is to multiply by 5 your declared income (assuming you have no debts) to get the mortgage ceiling. In this example, you have $875,000. That's what a lender is likely to give you.
What if the home you want requires less than an $875,000 mortgage? You'll want to write off income to pay fewer taxes. However, keep in mind that if you overshoot this, you'll be stuck with less mortgage than you need.
See this YouTube video to see how you can strategize how much self-employed income to declare:
Your income statement can affect your mortgage: How much to declare in taxes as a self-employed person
One thing to note about this topic is that June is generally the deadline to file taxes for entrepreneurs, which means you declare taxes a bit later than people who are employees.
So, if you are in the first half of the year, you still have time to work on what to declare for the last calendar year. You can follow the exercise that we just did a little earlier.
If you're in the first six months of this year and last year wasn't that great in terms of income, there is a short window of opportunity to not have to count this for your mortgage calculations! This is because before you submit last year's taxes this June, at this point you are averaging two years before this which, might have been better for your income average.
So if you really have to buy a house right now, and the last two years' income was much stronger, then you can do is this:
Submit to the lender the last two years before this last one, and this way you'll have a higher average.
Keep in mind that your home should ideally close before the June tax deadline.
Warning: If your home closes after June, there is a chance the lender might insist to see last year’s T1 statements. It’s a grey area and depends on the situation - talk to your mortgage broker about it.
Bottom line: You have this privilege, being self-employed, to declare your taxes six months into the next year so take advantage of this window if needed.
Can you get a mortgage today if your business is very new?
What if your business has only been around for six months to one year? Is there any hope of getting a mortgage? Yes!
There are programs that will make an exception to the usual two-year rule, and you can talk to your mortgage advisor to see if you qualify.
Here is how some lenders extrapolate your last six months of income:
If you have less than a 20% down payment and have an insured mortgage, despite more scrutiny on your file from the government, there are Stated Income Programs where they look to make an exception on not having to take it two years on average but instead, take one year average. Below is an excerpt from their website on how special exceptions can apply:
*For recently self-employed borrowers who have been operating their business for less than 24 months, or have been in the same line of work for less than 24 months, additional eligibility factors to support the decision to lend could include:
Acquiring an established business
Sufficient cash reserves
Predictable earnings
Previous training and education
Borrower’s demonstrated history of managing credit*
If you have a down payment over 20%, you are eligible to work with alternative lenders who are much more flexible. In fact, one of the most famous programs right now is the six-month bank statement program where, literally, if you're having an amazing last six months, they'll look at your bank statements only for the last six months, see the revenue inflow in your statements, and extrapolate it by multiplying this by two so there is a predicted one-year income figure.
THE BOTTOM LINE
Are you ready for a self-employed mortgage? As entrepreneurs, we do not like to be told no and instead, appreciate a “no but here is a possible solution.” While your bank may have done the former, this article gave you some key considerations on the latter. We covered:
How to decide the optimal income to declare as an entrepreneur
How to take advantage of the late self-employed tax deadline if you had an off-year
Exceptions to getting a mortgage even if your business has been operating for under two years.
Do you want to learn more about mortgage financing in Canada? Level Up Mortgages supports homebuyers and homeowners in attaining success in their mortgage journey with mortgage strategy, digital mortgage education, and introductions to all the other experts you need to succeed in home buying and your personal finance.
To assist homebuyers and homeowners in purchasing or refinancing new homes, we work with premier banks and best-rate mortgage lenders in British Columbia and Ontario. Get in touch with us today!
See what you qualify for or contact Paul to get your pre-approval.
Paul Davidescu (www.levelupmortgages.com)
604-809-3188
paul(at)levelupmortgages.com
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