One of the most important pieces of information that you need to confirm in order to qualify for a mortgage is satisfying the lenders requirements with respect to your income. Last week I explained the ins and outs of satisfying the requirements for those of you who are commissioned employees.
Now let’s look at requirements for those of you who are self employed:
SELF EMPLOYED- being self employed obviously has several tax benefits, but when it comes to qualifying for a mortgage (or any kind of credit for that matter) being self employed can be the most difficult incomes to verify. There are two ways to look at self employed income. Typically to qualify under a traditional mortgage with a financial institution and qualify for all of the best rates and terms, the lender will look at a borrower’s net income. The net income is the amount of income that you pay tax on after all of your write offs. On your notice of assessment and/or T1 General, the lender will look at the “line 150”, which is the NET income that you report every year. A lot of borrowers are confused between the “gross” and “net” income they report and what they can use to qualify. For businesses where there are a lot of write offs against the income or in a business where a lot of the business is paid in cash, the net income can be much lower than the income that you actually take home. Lenders will typically allow a self employed borrower to either gross up their NET income by 15% (take their two year average income and add 15%) or use add-backs from the gross income. The add-backs that are allowable to be added back to your net income (and therefore increasing the income they use to qualify the loan) are: motor vehicle expense, business use of home, meals and entertainment and your capital cost allowance.
Being self employed means that you will be asked to provide more documentation than any other income type. The usual documentation that you should be expected to provide are: your two most recent personal notice of assessments from Revenue Canada (called NOAs) and one of the following: your two most recent personal tax returns (T1 generals) and including the Statement of business activities (which will show your deduction from your gross income) OR your articles of incorporation showing ownership in a company OR a business licence. Lenders are looking to confirm that you have been self employed for at least two years so they are looking for any of these documents to verify that you have been self employed that long.