There is a myth out there that self-employed individuals have a harder time being approved for a home mortgage. Thankfully, this is not the case. Self-employed individuals can use a type of mortgage insurance offer in Vancouver, called the “Business for Self (Alt A.) Program.” This is one type of “stated income mortgage.”
Not only that, in some cases, those who are self-employed don’t even need to use a special mortgage program; they can apply for a ‘regular’ mortgage just like any employed person.
However, working with a Vancouver mortgage broker to get these types of deals is really important. There are several intricacies that can dictate which program a self-employed person is suitable for. There are also factors that can determine how likely these applications will be approved by lenders. So, you’ll want the application to be presented ‘just right.’ This can increase your chances of approval.
On top of that, you’ll want to know you’re getting the best self-employment mortgage rates on the market!
If you are a business owner, we encourage you to get in touch with our lead mortgage broker in Richmond, B.C. He can help with mortgages in Metro Vancouver, and all of Western Canada, too.
Contact us today!
Email: simon@bcmortgagesolutions.ca
Office: 604-495-8787
Cell: 778-929-3678
Below, we answer some questions to help you understand self-employed mortgages better.
What is the difference between a self-employment mortgage and a conventional mortgage?
There are mortgage programs, offers and rules that are designed specifically for self-employed individuals. However, the mortgage that a business owner can apply for ultimately depends on their income.
You see, many business owners claim income on their tax return that is much lower than their actual, take-home pay. This is because of all the tax write-offs they are eligible for.
In other cases, people earn a significant portion of income from tips. These tips often come as cash payments. Not everyone tracks and reports these earnings accurately on their income tax return (though they should, legally).
When documented income seems too low to justify the expense of buying a home, this raises a ‘red flag’ with lenders.
And herein is the main issue: it’s not so much about whether you are self-employed or not. It’s about what you earn and what you can afford.
Read moreClick an item below to expand its details.
Lenders understand the need for self-employment mortgages in Vancouver
Of course, lenders are not unaware of the circumstances that self-employed people are in. Everyone knows that business expenses are regularly claimed as tax-deductions. They also recognize that income from tips can be significant enough to pay bills.
For this reason, the industry has some workarounds to benefit business owners who want to buy a home.
That’s where the Business for Self (Alt A.) Program by Sagen (formerly, Genworth Canada) comes in.
This is a mortgage insurance program that allows sole-proprietors and incorporated business owners to ‘state’ their actual income, using what’s referred to as a “stated income mortgage.”
Some people call this an “unverified income mortgage” or “no proof of income mortgage,” and other similar terms. They refer to the same thing. And, different mortgage insurance providers offer similar programs.
Stated income mortgages calculate self-employment income differently
A stated income mortgage allows for what’s called a “gross-up,” or an “add-back” calculation on income. Here is how they work:
- A “gross-up” calculation adds up to 15% to your claimed income as a sole proprietor (based on a 2-year average). This accounts for general tax deductions most self-employed people make. It’s like bringing back the gross amount to the net amount, based on an estimate. It can not be used for incorporated business owners.
- An “add-back” calculation goes through your deductions more specifically, then adds them back to your claimed income. It can apply to both sole proprietorships and incorporated businesses.
A mortgage broker can look at your unique case, to decide which type of calculation to use in your self-employed mortgage application. The goal will be to increase your stated income while using the method that applies to you.
For example, if your sole-proprietorship recently bought a car, that would be a large deduction (in the first year, as a Capital Cost Allowance). But, it’s a one-time purchase. So a mortgage broker may recommend using the add-back method in this case.
On this note, it’s important to know that not all deductions can be used in the add-back method. Advertising, insurance, rent, wages and other items can’t be added back. However, office supplies, vehicle expenses and items that fall under Capital Cost Allowance (CCA) are usually allowed.
This is why it’s so important to work with a Vancouver mortgage broker for something like a self-employment mortgage; they’ll be able to go through your paperwork to determine what can be added back, and what can’t.
Stated income mortgages have added rules to be aware of
Stated income mortgages also come with a slightly higher down payment minimum, at 10% (instead of 5%). This minimum assumes that mortgage default insurance will be necessary, since the down payment is less than 20%. You can learn more about insured mortgages, here.
Click an item below to expand its details.
Insured stated income mortgages (lower than 20% down payment) can only be used to purchase properties that:
- Will be the primary residence of the purchaser.
- Have only one extra unit (allowed as a rental).
- Are easily sellable in the case of foreclosure.
- Can remain in good shape for at least 25 years.
- Do not exceed $1M in purchase price.
The insured stated income loan itself must:
- Not require more than $750K in loans (in Metro Vancouver, or $600K for rural areas).
- Come with a maximum 25-year amortization period.
- Meet specific interest rate thresholds and rules (ask us for more details).
Some of the above factors also apply to any insured mortgage.
There can be other restrictions to this type of mortgage, which a mortgage broker will notify you about.
And, in case you’re wondering, stated income mortgages can be used for refinancing a home.
Not all self-employed business owners need to use stated income mortgages
Remember: being self-employed is not what determines whether or not you need a stated income mortgage in Vancouver. It’s about how much provable income you can show a lender. The question is really about whether you’re ‘good for the money’ and can pay back your mortgage reliably.
If the earnings on your Notice of Assessment (NOA) are sufficient, you may be able to use a conventional mortgage to finance a home purchase. You would be treated like any other employed individual.
If you’re not sure what type of program you’ll qualify for, we encourage you to get in touch! We have the know-how to be able to determine this for you. Our contact information is:
Email: simon@bcmortgagesolutions.ca
Office: 604-495-8787
Cell: 778-929-3678
Here is a summary of the self-employed mortgages available in B.C.
Click an item below to expand its details.
Insured stated income mortgage (non-traditional proof of income):
- Minimum 10% down.
- Gross up can be up to 15% (sole proprietor only), or an add-back can be used.
- Can’t be used for rentals (owner must live in one unit if renting a second unit).
- Example specialty insurance program: “Business for Self (Alt. A) Program” by Sagen (formerly, Genworth Canada).
- ‘A’ lenders (i.e. banks) only.
Uninsured stated income mortgage (non-traditional proof of income):
- Minimum 20% down.
- Higher rates (usually 1% to 1.5% higher) plus a 1% lender fee on the mortgage amount.
- Requires 6 – 12 months of bank statements to determine income.
- Gross up can be up to 15% (for sole proprietors only), or an add-back can be used.
- ‘B’ – ‘C’ lenders + private lenders.
Insured, documented income mortgage (traditional proof of income):
- Minimum 5% down.
- Gross up can be up to 15% (for sole proprietors only), or an add-back can be used.
- Can use any qualifying insurance program using Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada), or Canada Guaranty.
- ‘A’ – ‘C’ lenders + private lenders.
Uninsured documented income mortgage (traditional proof of income):
- Minimum 20% down.
- Gross up can be up to 15% (for sole proprietors only), or an add-back can be used.
- ‘A’ – ‘C’ lenders + private lenders.
Generally, all self-employed mortgage programs allow the down payments to be gifted, except in circumstances where only 5% is being put down on an insured mortgage. Individual lenders may have different requirements.
Finding and choosing the right mortgage for your case can be confusing. The easiest way is to contact a mortgage broker in Vancouver. We’re ready to help!
Email: simon@bcmortgagesolutions.ca
Office: 604-495-8787
Cell: 778-929-3678
What are the application requirements for a self-employed mortgage in Vancouver?
Above, we mentioned that you can just ‘state’ your income to qualify for a self-employment mortgage in Vancouver.
However, no one can just make up any number and decide to ‘state’ that as their income. The stated income mortgage application needs to be reasonable for the industry, the size of the business, the type of work being done and how much time is put into that work, etc.
Then, there will still be more to prove about your income and ability to repay your mortgage on time. This will also be the case if you are self-employed, and applying for a conventional mortgage (i.e. not a stated income mortgage).
Read moreA self-employed mortgage application should include:
- Your full Notice of Assessment (NOA).
- A business license or articles of incorporation showing you’ve been in business for at least two years.
- A good credit score and history of paying bills on time, for both yourself and your business.
- Business financials showing what you earn, how much your business earns and that all taxes and debts have been paid off.
- Proof that your down payment is not being gifted beyond an allowable percentage (depending on the lender).
Plus other documents that a mortgage broker will advise you on.
Do contact us, and we’ll be able to explain this process in more detail:
Email: simon@bcmortgagesolutions.ca
Office: 604-495-8787
Cell: 778-929-3678
How much cash do I need to buy property with self-employment income?
The amount you need for a down payment to buy a home with self-employment income can vary depending on what you want to buy. Generally, you should expect to put down at least 10% of the purchase price of the property. Though, it may be better to have more, depending on your circumstances.
The best way to determine the amount you need is to consult with a mortgage specialist.
Self-employed mortgages are possible when working with a dedicated mortgage broker!
There’s no need to fret about qualifying for a home mortgage when you are self-employed. The process can be easier than most people realize.
Not only that, when you work with a specialist, such as our Vancouver mortgage broker (in Richmond), you’ll get customized advice and help for your unique, financial situation.
We encourage you to get in touch with us today! We understand your needs as a business owner (we fall in that category too!). We’ll work hard to find you the best rates and deals so you can purchase a home while still enjoying the benefits of being self-employed.
Email: simon@bcmortgagesolutions.ca
Office: 604-495-8787
Cell: 778-929-3678
