Millions of Canadians now work for themselves, in everything from construction subcontracting to corporate law. Roughly 2.9 million Canadians were self-employed in 2018, according to Statistics Canada, and many of them are keen to buy a home.
Unfortunately, many of the practices around proving income for a mortgage were developed for potential homeowners with secure, stable, T4-documented day jobs. Can an entrepreneur who runs their own payroll department — or may be a sole proprietor of just one — prove they make enough income to handle a mortgage?
Quite simply, the answer is yes. The process for mortgage brokers is a little longer, but it is by no means impossible to secure a loan. Here is a step-by-step process breaking down everything you, as a broker, need to do to land a mortgage for a self-employed client:
Know your customer
As with any client, self-employed or on the payroll, KYC is a critical step in any mortgage broker’s job. Victor Tran, a mobile mortgage broker at True North Mortgage, says the client will need to provide at least a two-year history of filed income tax returns as a ‘business for self,’ or articles of incorporation and financial statements for incorporated businesses.
Some clients might be able to get away with submitting their tax forms to a broker later on in the mortgage transaction process. But Tran says self-employed clients should come to their first meeting prepared.
“If I come across anyone that’s seeking a mortgage who’s self-employed, whether it’s a purchase, transaction renewal, refinancing, or pre-approval, I prefer to collect documents up front,” Tran says, “so I have a better idea of how healthy their business is and how much they actually pay themselves.”
Prakesh Bector, director of residential sales at Equitable Bank, says brokers should ask their clients a series of high-level questions to better understand how they earn a living. To start, what type of business do they operate? Is it a digital marketing agency? A day trading service? An independent barbershop?
The broker should also be able to determine whether the business is incorporated or not (and if so, how and when it was incorporated), and whether the client owns the entire business, or shares ownership with other partners. Among one of the most important questions for a broker to ask is how a client generates revenue. Is it through advertising campaigns, a management fee, or straight-razor shaves?
Understand your client’s business structure
Next, brokers should take a magnifying glass to a client’s business. “This is a deeper review of the business the client operates so you can get an idea of how it works,” Bector says in an email. Many of the questions are follow-ups to the KYC process described earlier.
Who does a client’s business serve? How do they source clients? Is that barbershop mainly bringing in customers through a sophisticated online marketing campaign, or through word-of-mouth among a core group of devoted customers? Are those customers mainly coming in through specific seasons (such as just after major earnings reports) or is there a steady flow of customers into the business? What expenses does it incur year round?
Finally, after a client has answered all of these questions, brokers should look for documents like business bank statements, T1 General tax returns, or contracts. Any issues in the viability of a client to carry a mortgage should become quite apparent at this point, one of the reasons it is so critical for mortgages to take a critical eye to any application.
“You can save a lot of time and frustration if you determine early in the process that a client has no way to prove income being claimed,” Bector says.
Review your client’s income
Then, once the questions are done, brokers should turn to the numbers before them in a client’s documentation. “Lenders would want to see the financial statements in a healthy state,” Tran explains, “meaning you’re not showing a deficit or a loss in income every year.”
Exactly what qualifies as a good income situation, in the eyes of a lender, really depends. “There’s really no ideal scenario,” Tran says. “There are so many different types of self-employed individuals over there.”
In his own business, Tran deals with plenty of IT contractors who get their commission checks from whichever major company employs them wired directly into their corporation. Lawyers, doctors, and mortgage brokers themselves deal with many individual clients, but typically earn healthy annual revenues. But a self-employed business could be a mom-and-pop convenience store with modest annual incomes and a handful of hardworking employees.
Regardless of a client’s line of work, brokers should be able to line up the story their financial documents tell with the profile of their business. Bector says brokers should consider whether all of the revenue generated by a business is captured on the documents provided, whether financials are audited and completed by a third party, and whether any listed expenses are reasonable for a business.
By the end of this step, Bector says, a broker should understand enough about the client to know what type of lender they need for their mortgage.
Find the best lenders for your client
After a broker is confident their client could receive a mortgage, they need to call around and find the best deal possible. Exactly which lender is best will depend on a number of factors, chief among them the stability and reliability of a client’s income.
While private and alternative lenders are known for giving mortgages to clients otherwise ignored by A lenders, including self-employed clients, Tran says the three biggest lenders he works with — TD, Scotiabank, and Think Financial — all have self-employed programs.
“Most of my business is A lending,” Tran says. “The rates I offer my clients that are paid full-time salaries will be the same as those offered for self-employed individuals.”
For clients unable to adequately prove their income to the satisfaction of an A lender, there are a variety of other programs available to get them signed up for a mortgage. One is a stated income program. Trans says these programs allow a client to simply state their business income, rather than hand over financials, and go off their last two years of income tax returns.
But there are downsides. Tran says borrowing limits are lower and the client may have to put as much as 35% down. Alternatively, a B lender might be a better road for a client if an A lender’s self-employed program is too much of a hassle for them.
Once a lender has agreed to take on a client, the process is more or less the same as someone who isn’t self-employed. But Tran says there is one key difference. Many self-employed people have some outstanding taxes to the CRA. Nearly all lenders will want those taxes to be paid and up to date before closing the deal.
All in all, self-employed clients are more than able to qualify for a mortgage. Lenders might require a bit of extra paperwork and time — an extra day or two at most, Tran says — but are more than happy to work with self-employed clients across a variety of circumstances.