For a self-employed applicant seeking a loan, the most difficult challenge, aside from credit history, is historically proving income. Our current economy promotes, to a certain degree, the cash transaction. Alternatively, accounting practices generally tend towards minimal personal income tax paid by the proprietor(s). Thus the self-employed may be in a better position from the outside looking in; however, financial institutions generally look for stability and a client’s proven history of paying off debt. The options in lenders fall into two categories: Equity (appraisal value); or Income/Credit/Debt Servicing.
Did you know…
… that in January 2005 CMHC improved access to the full spectrum of the homeowner mortgage insurance products for self-employed Canadians?
- To determine income for a self-employed borrower, a simple gross up of the Total Income (Line 150) on their Canada Revenue Agency (CRA) Notice of Assessment (NOA) by 15% can be used.
- Borrowers who have eligible deductions in excess of 15% of the income on their NOA may opt to provide audited or accountant prepared financial statements to support a higher income level, in lieu of the standard 15% gross up.
- Self-employed applicants are normally required to demonstrate at least two full years of operation of their business.
- If a borrower has been working for an extended period of time and recently became self-employed in the same field, the two-year self-employment requirement does not apply.
- Minimum time of business operation can be documented through income tax returns supported by the borrower’s NOA, business credit reports, GST returns, active business bank accounts, audited or accountant prepared financial statements.
Want to learn more?
Visit CMHC website at www.cmhc.ca