If you have an accountant, part of their job is keeping your taxable income as low as the rules allow. Then you apply for a mortgage, and a lender looks at the income on your Notice of Assessment and qualifies you on that figure. Both of those things are working as designed. They just pull in opposite directions.
What lenders actually read
On a standard self-employed application, a lender will typically ask for two years of Notices of Assessment from CRA, along with your T1 General returns, and qualify you on the income shown on line 15000, averaged across the two years.
That figure is what CRA has on record after your business expenses are deducted, which is why it can look a lot smaller than what actually came through the business.
One thing to know about the average: if one year’s income is significantly lower than the other, a lender may use the lower figure instead. Some lenders will also add back certain non-cash deductions, such as depreciation, when calculating your income, but that varies from lender to lender.
A deduction that lowers your tax bill also lowers the income a lender can count. Neither your accountant nor your lender is wrong. They are answering different questions.
Insured programs built for self-employed borrowers
The mortgage insurers have programs for exactly this situation. Sagen’s Business for Self (Alt. A) program and Canada Guaranty’s Low Doc Advantage both allow an insured purchase up to 90% loan-to-value, which means a minimum 10% down payment. On both, at least 5% has to come from your own resources, and the rest can be a gift from a relative.
Instead of relying only on line 15000, these programs look at whether the income you state is reasonable for the type, size and length of your business, alongside your credit and overall financial picture. Both require you to have been self-employed for at least two years.
Two things to go in knowing. First, the insurance premium is higher than on a standard file. Sagen publishes a premium of 5.85% on this program at 85.01% to 90% loan-to-value, compared with 3.10% on a standard CMHC-insured mortgage in the same band. Second, credit matters: Sagen requires a minimum credit score of 600 above 80% loan-to-value.
If the insured programs do not fit
Sometimes the business is too new, or the last two years do not reflect where things are now. Alternative lenders, sometimes called B lenders, have more flexible income verification and price above standard lending. They are normally used for a shorter term, as a bridge back to standard financing once your income history supports it. Where each option sits relative to the others is laid out on my rates page.
What lenders commonly ask for
- Two years of Notices of Assessment from CRA, and confirmation you have no income tax arrears.
- Two years of T1 General returns, including the business schedules.
- Proof of the business, such as a business registration or articles of incorporation.
- Financial statements if you are incorporated.
- Recent business bank statements, which matter more the further a file is from standard.
If you are planning to buy in the next couple of years, let your accountant know a mortgage is coming. The income on your Notice of Assessment is the figure a lender will work from, so it helps to have everyone on the same page before your next return is filed. Talk to me early too, so we know what your numbers will support.
Sources: Two year averaging of line 15000 from Notices of Assessment, add-backs of non-cash deductions such as depreciation, and the documents lenders commonly ask for, as described in nesto’s Self-Employed Mortgages in Canada and rates.ca’s Self-employed and looking for a mortgage? Here’s what you need to know. A lender may use the lower year where one year’s income is significantly lower, as described in Ratehub’s Self-Employed Mortgage. Loan-to-value limits, down payment sources, stated income reasonability, the two year self-employment requirement, credit requirements, the no income tax arrears condition and the 5.85% premium are from Sagen’s Business for Self (Alt. A) and Canada Guaranty’s Low Doc Advantage (Self-Employed). The 3.10% standard premium is from CMHC’s CMHC Mortgage Loan Insurance Cost. The $1.5 million insured price cap and the 20% minimum down payment at $1.5 million or more are from the Financial Consumer Agency of Canada’s How much you need for a down payment. Program rules vary by insurer and lender and change over time. This article is general information, not advice on your specific file, and not tax advice.