Ten years ago 387,200 British Columbians were self-employed. Today, this number has increased by 18% to 416,500. Nearly one in every five British Columbians now works for themselves. When it comes time to getting a mortgage or refinancing an existing mortgage, self-employed workers are treated differently from salaried employees.
Who is Self-Employed?
Typically, lenders at financial institutions consider someone self-employed if they:
• run a business alone as a sole proprietor, with a partner, or as a corporation;
• receive 25% or more of their income from the business;
• work on short contracts for different employers; or
• are paid solely on a commission basis.
In contrast, a salaried employee is someone who receives a regular paycheque from an employer, or even several paycheques for part-time work for multiple employers.
Different Rules For The Self-Employed
Since 2011, the federal Department of Finance has imposed a range of stricter rules on mortgages for all borrowers, for example:
• reducing maximum amortization periods to 30 from 35 years;
• restricting the percentage borrowers can refinance; and
• requiring borrowers with less than a 20% downpayment to meet standards for a five-year fixed rate mortgage.
For the self-employed, new rules brought in two years ago by Office of the Superintendent of Financial Institutions require anyone working for themselves applying for a mortgage or refinancing from a federally-regulated financial institution to have a minimum downpayment of 35% of the home price.
The mortgage must also be insured by Canada Mortgage and Housing (CMHC), Genworth or Canada Guaranty.
Credit Unions, however, are not federally regulated and may require self-employed workers to have a downpayment as low as 20% without requiring mortgage insurance.
Self-Employed Need Proof
Self-employed borrowers will have to prove they have a viable business, a good credit rating and a good history of paying bills and a good history of paying bills and loans on time.
Borrowers in business for three or more years are required to verify net taxable income - what remains after business deductions are subtracted from gross earnings.
Lenders will want to see the past two years of these documents:
• monthly bank statements;
• Canada Revenue Agency assessment notice;
• business balance sheet and profit-and-loss statement;
• business credit card statements; and
• credit references or letters from financial institutions.
Lenders may also ask for a letter from the borrower’s accountant, proof that rent is paid on time, and a personal balance sheet showing assets such as stocks, and debts such as credit card or car loans.
Self-employed borrowers in business for three or more years are required to verify net taxable income – what remains after business deductions are subtracted from gross earnings.
Self-employed borrowers in business for less than three years will also be required by CMHC (or other mortgage insurers) to complete a stated income application. For information on CMHC’s program for self-employed, see: www.cmhc.ca/en/hoficlincl/moloin/hopr/upload/CMHC-Self-Employed.pdf
Averaging Net Income
Just because a self-employed worker had a net income of $120,000 the previous year, does not mean they will qualify for a mortgage based on this amount.
Instead, a lender determines the amount a self-employed borrower will qualify for by reviewing several years of earnings and averaging them.
For example, a self-employed borrower’s income for the last three years might be analyzed as:
| Year | Net Income |
| 2013 | $120,000 |
| 2012 | $80,000 |
| 2011 | $30,000 |
| Average net income = $76,666 |
The lender will base the amount loaned on the average income of $76,666.
As the number of self-employed workers continues to increase, REALTORS® should advise their self-employed buyers to take the time to collect the documents mentioned here and to make copies and prepare a binder to give to lenders to demonstrate their credit worthiness.
(Source REBGV)
