If you are self-employed, you may have looked at the income shown on your tax return and wondered:
“Will a lender only use this number when I apply for a mortgage?”
The answer is not always straightforward.
Self-employed borrowers can have income structures that look very different from those of salaried employees. Depending on the lender, mortgage programme and the borrower’s circumstances, the documentation and income assessment can also be different.
That does not mean every self-employed borrower can qualify using a higher income amount. It means the complete application needs to be reviewed before assuming that one taxable-income number determines the result.
Why self-employed mortgage applications can be different
A salaried employee may be able to document income using items such as an employment letter, pay statements and tax documents.
A self-employed borrower may instead operate as a:
- Sole proprietor
- Partner
- Incorporated business owner
Because business income can fluctuate and business owners may deduct legitimate expenses, lenders may need additional information to understand both the borrower’s income and the financial stability of the business.
CMHC’s current self-employed mortgage-insurance guidance, for example, says documentation can depend on the borrower’s circumstances and may include tax returns, Notices of Assessment, business financial statements, business account information and other supporting records.
Does a lender only look at your Notice of Assessment?
Not necessarily.
A Notice of Assessment, or NOA, can be an important part of the documentation package, but it may not be the only document considered.
Depending on the lender and programme, supporting information can include items such as:
- T1 General tax returns
- Notices of Assessment
- Statement of Business or Professional Activities, such as a T2125
- Business financial statements
- Business bank statements
- GST/HST records
- Business licence or articles of incorporation
- Contracts or other documents supporting current income and business activity
The exact requirements are lender-specific, and not every document will be required in every application.
What about business expenses and “add-backs”?
This is an area where self-employed borrowers should be careful about general advice.
You may hear that lenders simply “add back” business expenses to increase qualifying income. That is not a universal rule.
Some mortgage programmes do have specific methods for recognizing certain self-employed expenses or adjusting the income used for qualification.
For example, CMHC currently states that, in certain insured self-employed applications involving sole proprietorships or partnerships, income may be grossed up by 15% or certain eligible deductions may be considered through an add-back approach. CMHC also identifies specific documentation requirements for those calculations.
However, this should not be interpreted to mean:
“My taxable income is $60,000, so every lender will automatically increase it by 15%.”
That would be incorrect.
The amount of income a lender is prepared to use depends on the applicable programme, the documentation, the structure of the business and the lender’s underwriting requirements.
How long do you need to be self-employed?
A two-year history is common in self-employed mortgage underwriting, but it is not an absolute rule for every programme.
CMHC says a minimum of 24 months operating the business or experience in the same line of work is recommended under its self-employed programme, while also providing flexibility for borrowers who have recently become self-employed when additional supporting factors are present.
Other programmes can have different criteria. For example, Sagen’s Business for Self programme includes a two-year business-for-self tenure requirement for the programme described on its current website.
This is one reason it is useful to review the application before deciding that a borrower either qualifies or does not qualify.
Income is only one part of mortgage qualification
Even if the lender is comfortable with the income documentation, the rest of the mortgage application still matters.
A lender may also review factors such as:
Credit history
Your credit history helps the lender assess how you have managed existing obligations.
Existing debts
Credit cards, lines of credit, car loans, other mortgages and other ongoing obligations can affect mortgage qualification.
Down payment
For a purchase, the amount and source of the down payment need to be reviewed and documented.
Home equity
For a refinance, the property’s value and the amount already owing against the property will affect how much equity may be available.
The property
The property itself must also meet the lender’s requirements.
Overall affordability
The lender needs to determine whether the mortgage is supportable together with the borrower’s other financial obligations.
CMHC’s mortgage application guidance likewise identifies income verification, down payment documentation and existing debts as important components of the mortgage application.
What should a self-employed borrower prepare?
If you are planning to purchase, refinance or renew and want to explore other mortgage options, it can help to start gathering documents early.
Depending on your circumstances, useful documents may include:
- Your most recent tax returns
- Notices of Assessment
- Business financial statements
- Business registration or incorporation documents
- Recent business bank statements
- Information about existing mortgages and debts
- Proof of down payment or available savings
- Property information, where applicable
You should not assume that every lender will request exactly the same documents.
The objective is to understand which income method and documentation requirements apply to your particular application.
Why reviewing the application early can help
Self-employed borrowers sometimes assume they cannot qualify because the taxable income shown on their return appears lower than expected.
Others make the opposite mistake and assume their business revenue will automatically be treated as personal qualifying income.
Neither assumption is reliable.
A mortgage review can help determine:
- What documentation is available
- How long the business has been operating
- How the income is structured
- Which debts need to be included
- How much down payment or equity is available
- Which lender categories or mortgage programmes may be worth comparing
- What additional documentation may be required
The goal is not to force the application into a particular mortgage product. It is to understand the complete financial picture before comparing possible options.
Key takeaway
If you are self-employed, do not judge your mortgage options from one number on your tax return alone.
At the same time, do not assume that business expenses can automatically be added back or that gross business revenue will be accepted as qualifying income.
The appropriate income assessment depends on the borrower, business structure, supporting documents, property, lender and mortgage programme.
Reviewing the complete application first can help you understand which mortgage options are realistically worth considering.
Considering a mortgage as a self-employed borrower?
If you are self-employed in Ontario and planning a home purchase, refinance or mortgage renewal, I can review your situation and help you understand what documentation may be required and which mortgage options may be worth comparing.
Chi-Ying Lui (Tammy)
Mortgage Agent Level 2
Dominion Lending Centres Rolima Financial Group
FSRA Brokerage Licence #13216
tammy@rolimateam.ca
mortgagesbytammylui.ca
Mortgage options, rates, terms and qualification requirements vary by lender and borrower circumstances and may change without notice. Subject to lender approval and applicable terms and conditions.