How Ontario lenders assess self-employed mortgage applicants

If you run your own business, the income a lender uses to qualify you may be quite different from what the business earns. The difference comes from how lenders verify income and how each lender's policy treats the documents you provide.

This article explains what lenders commonly look at and why two lenders can reach different answers on the same file.

Why self-employed income is assessed differently

Salaried borrowers usually prove income with a pay stub and an employment letter. Self-employed borrowers don't have an employer to confirm their income, so lenders rely on tax documents and business records instead. Most lenders want to see income that has been declared to the CRA, is reasonably stable, and is likely to continue.

The documents lenders usually ask for

• T1 Generals for the last two years, which show your total personal income.
• Notices of Assessment for the same years, which confirm the CRA assessed that income and show whether any tax is owing.
• Corporate financial statements, usually two years, if you are incorporated.
• Proof the business exists, such as articles of incorporation, a business registration or a licence.
• Bank statements, business and personal, in some cases.

Sole proprietors

Lenders normally start with your net business income from your T1 General, then average the last two years. If income is rising, some lenders use the average; if it is falling, many use the lower year.

Some lenders add back certain non-cash or discretionary expenses, such as part of capital cost allowance or business-use-of-home costs. Which expenses can be added back, and how much, is lender policy, not a fixed rule.

Incorporated business owners

If you own a corporation, the income on your personal tax return is usually the salary and dividends you paid yourself. Lenders generally start there.

Dividends are often grossed up by some lenders to reflect their lower personal tax rate. Others use the amount as declared. Consistency matters: dividends paid only in one year may be treated with caution.

Retained earnings are profits left in the corporation. Some lenders will consider part of them in specific circumstances, typically by reviewing the financial statements and your ownership share. Many lenders won't count them at all. They do not automatically count as qualifying income.

Debt and credit still apply

Whatever income figure a lender uses, it is tested against your total debt payments, including any personal guarantees on business debt where the lender asks about them. Your credit history and any CRA balance owing also matter. Lenders differ here: some want tax debt cleared before they approve, while others are comfortable with it and will pay it out from the mortgage proceeds.

Prime, alternative and insured options

• Prime lenders usually want about two years of self-employment and fully documented income.
• Alternative lenders may accept other ways of showing income, usually with a larger down payment and a higher rate.
• Insured self-employed programs exist for some borrowers who meet the insurer's criteria.

Which route fits depends on your documents, your down payment and how soon you need the mortgage.

What you can do before applying

1. Gather two years of T1 Generals, Notices of Assessment and, if incorporated, financial statements.
2. Make sure your personal taxes are filed and paid.
3. Talk with your accountant about how the way you pay yourself may affect mortgage qualification, well before you apply.
4. Have your file reviewed against several lenders' policies before a formal application.

This article is general information about mortgage qualification in Ontario, not tax, legal or financial advice. Lender policies change; confirm current requirements before relying on them.