Self-employed comes in more shapes than you think
When people say "self-employed," they usually mean one thing. In practice, I see four:
- Business owners: sole proprietors, incorporated owners and contractors running their own operation.
- Side-business earners: people with a regular job plus self-employed income on the side, like gig work or a small sole proprietorship.
- Commission earners: people paid on T4A or straight commission, with no guaranteed salary.
- Landlords: people whose main income is from a job, but whose rental properties bring in enough that lenders need to look at their whole picture differently.
Lenders read each one differently, and some lenders suit each situation better.
The real problem usually isn't a "no"
Banks don't turn down self-employed people as often as you'd think. What happens more often is quieter: they lend you less than you could really carry. Because your income on paper is lower than what your business actually brings in, you end up underfinanced. A home equity line of credit or a line of credit that could keep your business running smoothly never gets offered.
The other common issue is the property. Self-employed people often want homes that suit their work: a shop, a big garage, land, or a suite that brings in income. Sometimes the bank isn't turning you down. It's turning down the property.
How lenders read your income, and why it matters who's asking
Lenders don't all treat self-employed income the same way. Some allow a gross-up, adding a percentage on top of your reported income. Others allow add-backs, counting certain expenses you wrote off back into your income. Policies differ from lender to lender, and from one type of business income to another.
The trick is matching your income to the lender whose rules fit it. A bank looks at what you hand them as income. I ask you to show me what your income really is, then work out what you can use, depending on what you want to achieve.
Sometimes the right match is an alternative lender, especially for someone with high gross income who writes a lot of it down to a small net income. That's a smart, responsible move: it keeps you from owing CRA large amounts. A lender who can add much of it back may let you qualify for a bigger home, or one better suited to your business.
Incorporated? Salary, dividends and money left in the company
How you pay yourself out of your corporation makes a real difference to what you can borrow.
- Salary (T4) is the easiest income for most lenders to read.
- Dividends count too, but lenders look at them differently.
- Retained earnings, the money left in the company, generally can't be used by mainstream lenders. Some alternative lenders will consider them.
Many owners find a mix of salary and dividends works well, rather than paying everything as dividends. Your accountant can help you find the right split for your taxes, and I can tell you how each option looks to a lender. Because I review a lot of business income documents, I know what a sound income structure looks like, and I can explain yours to an underwriter in a way that gets you the lending you need.
How long do you need to be in business?
The general rule for mainstream lenders is about two years in business. But there are exceptions.
If you've moved from a job into your own business in the same line of work, a year may be enough. For example, someone who sold a product on straight commission and then opened a business selling the same thing, with similar income on their tax return, may qualify sooner. Some lenders will also work with one year of income if you can show you belong in that industry.
Those options may come with a somewhat higher rate. These days, the difference is often smaller than people expect.
Planning to buy in a year or two? Start now.
Anyone planning to buy in the next year or two, or even further out, should sit down with a mortgage broker and set a plan. It takes about 30 minutes. From there, we check in every six months, and more often in the last two quarters before you buy.
If you want to travel a long distance, you take lots of small steps consistently. Regular check-ins mean there are no surprises when it's time to apply.
How I work a self-employed file
The biggest thing I do differently is look at your actual income alongside what you want to do, then check that the income supports that plan. I want you to live life, not be house poor. So I'll look at what we can use, what strategy fits, and what will keep you comfortable in your home.
My very first mortgage
My very first mortgage was for someone I knew who was self-employed. He was having trouble borrowing to start a new building project, and his bank had said no. He thought that going to an alternative lender meant he was doing badly. He simply didn't know he had other options until we talked.
That mortgage got him rolling. Today he's in a strong financial position with no mortgage at all. Looking back, I think it was one of the best things that happened to him financially.
Common worries
"Will I pay a much higher rate because I'm self-employed?" Not automatically. Being self-employed doesn't mean you get a higher rate. Sometimes a slightly higher rate is the better choice for your strategy, and you'd make that choice with your eyes open. Paying a little more on your mortgage can cost far less than paying more income tax or carrying a debt to CRA, which is one of the most expensive debts a business owner can have.
"Shouldn't I just go to my bank first?" The biggest myth I see is that the bank is the best place to start because it's there for you. Many of the self-employed declines I see happen because someone accidentally showed their bank something it didn't want to see, and now the bank can't "unsee" it. Talk to a broker before you apply anywhere.