There is no doubt that mortgages are getting harder to qualify for as the federal government continues to tighten rules. Finance Minister Jim Flaherty has been making huge headlines with efforts to keep the Canadian economy in check. According to articles like this one from the Financial Post, it appears to be working! So if the "Housing Bubble has been Averted" then why are Canadian lending institutions still tightening regulations even further?
The latest trend seems to be in reigning in self-employed individuals. Over the last couple of weeks, the lenders we deal with have been sending a lot of correspondence around tougher guidelines for self-employed individuals. The Toronto Star recently did piece called "Why it's harder for self-employed to get a mortgage" where several professionals were interviewed and they all agree that banks are still tightening up. Although no specific rule change was cited in the Star article, everything is stemming from changes made by the Office of the Superintendent of Financial Institutions starting in Fall of 2012.
As mortgage qualifications get tougher for the self-employed, I figured it would be good to outline the types of self-employment, income qualifications and what documentation is necessary to secure mortgage financing.
Types of Self-Employment
Here is a breakdown of different types of self-employment:
- Business Owners or Business for Self (BFS)
- Self-employed workers, sub contractors
- Commission-based workers with eligible deductions
- Individuals whose income comes from an incorporated business
- Individuals who work for a family business
- Self-employed professionals
Income Qualifications for Self-Employed
The following are some income qualifications to determine the eligibility of a self-employed individual for mortgage financing. Please note these are just guidelines and vary by lender and type of self-employment. I am only presenting these here to provide a larger picture of eligibility and qualification.
- Borrowers have to have been active in their profession for at least two years. No exceptions.
- Income is determined by adding lines 135 through 143 of the T1 General slip.
- Net eligible income is calculated based on the lesser of the average income for the past two years or the income for the past year.
- 15% can be added to the eligible net income
- If employment income - 100% eligible based on the past year.
- If dividend income the average of the past two years can be used.
- If a combination of dividend and employment: Income is calculated based on the lesser of the average income for the past two years or the income for the past year
Self-Employed Income Documentation Checklist
Canada Guaranty has a great one-pager that outlines what documentation is necessary to prove income for self-employed individuals.
If you are self-employed and looking to qualify for a mortgage in the next couple of years, we would love to have a conversation around planning what income you will have to show on what documentation to make sure you can be approved for the property you want to purchase.
Lets face it - this is a lot of information! Good thing you don't have to go at it alone, we would love to work with you! Contact Us Anytime!
Below are links to the stories posted above!