Self-employed mortgage: what lenders look at and what to prepare

In Canada, if you're self-employed, most banks, credit unions and monoline lenders qualify you on two years of personal tax returns. The two years of returns are your T1 General returns and the Canada Revenue Agency's Notices of Assessment for the same years. If your write-offs lower the income a lender sees, some lenders look at the business more broadly; with less than two years of history, alternative lenders may help, at a higher cost.

Why lenders ask for two years of returns

A salaried borrower proves income with a pay stub and a letter from an employer. As a self-employed borrower, you have neither, so lenders rely on what you reported to the Canada Revenue Agency (CRA). Two years shows whether your income is steady, rising or falling, which a single good year cannot.

Lenders want two documents for each year:

• T1 General: your full personal tax return, as filed, including the business schedules.
• Notice of Assessment (NOA): the CRA's summary after it processes your return. The NOA confirms the return was filed and assessed, and shows whether you owe anything.

Lenders often look at the average of the two years. If your income dropped in the more recent year, many lenders lean on the lower figure. The lender decides how your income is calculated, so two applicants with the same returns can get different answers from different lenders.

Sole proprietor vs incorporated

How your business is set up changes what the lender reads.

Sole proprietors report business income directly on their T1. The figure that matters is your net income: revenue minus the expenses you claimed. Net income is the part that often surprises people. Every expense you write off lowers your tax, and the same expense also lowers the income a lender uses to qualify you.

Incorporated owners usually pay themselves salary, dividends or both, and those appear on the T1. Profit left in the company does not show up on your personal return. So lenders usually also ask for the company's financial statements for the same two years, and sometimes its corporate tax return.

Some lenders will consider part of the retained earnings; others look only at what you paid yourself.

Add-backs vary by lender

Some lenders "add back" certain expenses to your income when they qualify you. A lender adds an expense back because the expense reduced your taxable income without taking cash out of your pocket. Which items count, and how much, is lender-specific. No public rule sets which expenses a lender adds back, and a lender that is generous on one point may be strict on another.

Lender-specific add-backs are one of the main reasons a broker helps with self-employed income. We know how different lenders treat self-employed income and can show you the options side by side, rather than leaving you to learn one lender's policy at a time.

Taxes owing must be paid

Lenders check your NOAs for a balance owing. If you owe the CRA, most lenders expect the tax owing to be paid before your mortgage funds, sometimes out of the mortgage proceeds on a refinance. Lenders want the tax paid because an unpaid tax bill is a debt the lender has to account for. An unpaid tax bill can also suggest that cash flow is tight.

If you are behind on filing, file first. Lenders generally cannot use a year that has not been assessed. HST remittances can raise the same questions if you are registered, so have proof your HST remittances are current.

Self-employed borrowers still face the stress test

You qualify under the same rules as everyone else. You must show you could afford payments at the greater of your contract rate plus 2% or 5.25%. For insured mortgages, your housing costs generally cannot exceed 39% of gross income and your total debt payments 44%, both measured at that qualifying rate. Our stress test explainer covers the detail.

When the bank route does not fit yet

Some situations do not fit a bank's rules today: less than two years in business, a recent switch from salaried work to self-employment, or income that is real but heavily written down.

Alternative ("B") lenders may be an option. Alternative lenders are lenders outside the big banks that accept less conventional applications. Some alternative lenders consider a shorter history or stated income, meaning an income figure you declare that the lender judges reasonable for your work and industry. The lender wants the stated income supported by other evidence, such as business bank statements.

The trade-off with an alternative lender is cost: a higher rate, a lender fee and often a broker fee, all disclosed to you in writing before you commit. Many borrowers use an alternative mortgage for a term or two, then move back to a bank once their returns show the income.

The plan to move back to a bank matters. If you are planning a purchase a year or two out, it can pay to talk to your accountant about how your write-offs affect your borrowing before you file. We cannot give tax advice, but we can explain what the lender will see.

What to prepare

Before you apply, gather:

1. T1 General returns for the last two years, with all schedules.
2. Notices of Assessment for the same two years.
3. Proof that any taxes owing are paid, such as a CRA statement of account.
4. Your business registration, or articles of incorporation if you are incorporated.
5. Company financial statements for two years, if incorporated.
6. Several months of business bank statements.
7. Proof of your down payment and where it came from.

We never ask for documents, your SIN or account numbers by e-mail. When it is time to apply, we explain how to provide your documents securely.

What to do next

Use our call-me-back form and tell us how your business is set up and how long you have been self-employed. We will explain which lenders are likely to fit and what each will need. You can also read more about self-employed mortgages. All mortgages are subject to lender approval.