In our last blog, we looked at the stories of some past clients who dealt with specific mortgage qualification considerations tied to their self-employment. Depending on the situation, we need to cover different bases to get you approved for your mortgage. Here’s what you need to know about qualifying for a mortgage as a sole proprietor or an incorporated business owner!
Sole Proprietor
According to the Government of Canada, a sole proprietorship is…
An unincorporated business that is owned by one individual. It is the simplest kind of business structure. If you are a sole proprietor, you pay personal income tax on the net income generated by your business. You may choose to register a business name or operate under your own name or both.
If you’re a sole proprietor, only paying tax on Line 13499 of your return, the lenders will need to consider a two-year average. The lower your declared income, the harder it can be to qualify for a mortgage. In most cases, your gross revenues are not used to calculate the income needed for your mortgage.
Pro-tip: If you’re looking to buy in the coming year, let’s pre-plan your income tax claim to best position you for your purchase.
The list of what we’ll need from you can vary depending on the lending channel you’re in (regular bank versus an alternative lender) but here’s what we’ll need from you:
- Two years of T1 Generals (full tax return)
- Two years of Notice of Assessments (to prove no tax is owed)
- Your previous year’s income tax will need to be paid before closing
- Potentially T4A (if you’re a commissioned employee)
- This might also include a letter of employment from your sales office
- We may also need a year-to-date commission statement
- Potentially three to six months of bank statements (from your business account)
- Possibly invoices for jobs completed as well
Incorporated
The Government of Canada defines a corporation as…
When one or more entrepreneurs register a business with a provincial or federal government through articles of incorporation — documents that describe the type of business being created, its officers, directors and bylaws.
Corporations are considered legally separate from their owners… until you’re buying a home! If you’re buying a home in your name in Canada, whether you own a corporation or not, you will be personally guaranteeing that mortgage. Therefore, the mortgage is qualified on your personal ability to buy.
Assuming you pay yourself a combination of income and dividends from the corporation, we will use a two-year average of Line 10100 (how much you pay yourself in salary and what’s on your T4) and the dividends you pay yourself on Line 12000. Again, the lower your declared income, the harder it can be to qualify for your mortgage.
We need to also be conscious of increasing or decreasing either your salary or dividends too much from one year to the next. On a two-year average, lenders use the lower of the most recent year and not the average. Too much of a significant swing one way or the other will prompt further questions and documentation requirements.
Lenders reserve the right to ask for documentation they may need to help clarify anything in your file. The list can vary depending on the lending channel but what we’ll need from you is:
- Two years of T1 Generals (full tax return)
- Two years of Notice of Assessments (to prove no tax is owed)
- Your previous year’s income tax will need to be paid before closing
- Two years of T4s from your corporation
- Two years of T5s (dividends paid)
- Potentially T4A (if you’re a commissioned employee who gets paid to a corporation)
- This might also include a letter of employment from your sales office
- We may also need a year-to-date commission statement
- Potentially three to six months of bank statements (from your business account)
- Possibly invoices for jobs completed as well
- Incorporation documents including shareholder agreement and minutes
- Corporate tax return
- Corporate Notice of Assessment
- A business license and HST filings
There is no one-size-fits-all mortgage and your employment situation plays a huge part of what you can qualify for. Contact the Kyle Miller Mortgage Agent team if you’re self-employed or operate your own business. We’ll help you understand what’s best for your situation and help you navigate your options!
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