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Q & A: Mortgages for Self-Employed in Ontario

29 July 2012

It’s no secret that getting a self-employed mortgage anywhere in the nation is pretty tough right now. The banks restricting their lending practices and the federal government imposing new rules every day has made this type of mortgage even more confusing and has left self-employed homebuyers with even more questions. Here are those questions you’ve been asking yourself, along with the answers to them.

Why is it so hard to get a self-employed mortgage?
Before you can know how to work with the system, you have to know why the system is the way it is. It’s incredibly hard for self-employed individuals to obtain a mortgage simply because they usually don’t have the verifiable income that goes along with it. Self-employed individuals used to have two choices when it came to the income on their mortgage application: they could use ‘stated income,’ where they only had to tell the lender what their income is; or they could use ‘verifiable income,’ which would show the lender, in writing, how much income a person actually made. Very few lenders today are handing out “stated income” mortgages and it’s very difficult for self-employed individuals to verify their income. This is the sole reason why it’s so hard for them to get a mortgage.

How can I verify my income if I’m self-employed?
The first question leads into the second. Now that you know you have to verify your income, how exactly are you supposed to do that? By submitting your taxes, and claiming how much you actually made during that year. Mortgage lenders will ask that you use the average from Line 150 of your tax return, and that you use the average from at least two years’ worth of taxes. This will be enough verifiable income.

What other requirements are there to get a self-employed mortgage?
Getting a self-employed mortgage can be tough – very tough. In addition to verifiable income you’ll also need a great credit history, business registration papers if applicable, HST and GST returns if applicable, and a down payment. More on this last one in the next question.

How much of a down payment do I need?
The minimum down payment you can use for any mortgage in Canada is 5 per cent; and that’s only if you’re also willing to take on mortgage insurance and a shorter amortization period. But if you’re self-employed, the 5 per cent down may not even be an option. Because these loans are already so risky for the lender, they’ll typically require that you have at least 10 per cent in a down payment, or even the full 20 per cent.

Where can I get a self-employed mortgage?
With lenders becoming more strict by the day with regards to self-employed mortgages, and some pulling out of that market segment altogether, there are fewer and fewer lenders for self-employed homebuyers to turn to today. Private mortgages, those that are loaned by private individuals or companies, are often a very good route for self-employed individuals.

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