Self-employed in Alberta? How to qualify for a mortgage

Why self-employed mortgages are harder

Your accountant works to keep your declared income low. A lender lends based on your declared income. Those goals pull in opposite directions, and you feel it the day you apply for a mortgage.

Say you're a tradesperson invoicing $220,000 a year through a corporation. After vehicle, tools, home office, phone, insurance and a salary to your spouse, you might show $58,000 of personal income on your T1. That's good tax planning. To a lender reading the return, you're a $58,000 borrower.

There are 3 ways to qualify. They cost different amounts, and the gap between the cheapest and the most expensive can be tens of thousands of dollars over a term. Choosing the route deserves as much attention as the rate.

Route 1: qualifying on your tax returns

This is the cheapest route, and most self-employed borrowers can get there with 18 months of planning.

You qualify the same way an employee does, on 2 years of filed income, at the same rates from the same lenders. Your rate is the same. Only the paperwork is different.

You'll need:

• 2 years of T1 General returns, all pages including the business statement.
• 2 years of Notices of Assessment, which also show you don't owe CRA. Most lenders won't go ahead if you're in arrears.
• For an incorporated business, 2 years of financial statements, plus articles of incorporation or a business licence.
• Usually a 2-year history in the same business or the same line of work.

If you document them, lenders will often add these back to your declared income:

Capital cost allowance. Depreciation is a non-cash expense, and most lenders will add it back. If you have significant equipment or vehicles, this alone can raise your qualifying income noticeably.

Dividends and retained earnings. If you draw dividends as well as salary, many lenders will count the dividend income once you have 2 years of history. Some will consider retained earnings in the corporation on a strong file. This varies a lot by lender, and matching you to the right one is what a broker does.

If your business is profitable and your last 2 returns show it, this route is almost always open to you. The work is in the paperwork.

Route 2: business-for-self programs

If your filed income doesn't support the purchase but your business does, the next step is a business-for-self or stated-income program.

These programs qualify you on a reasonable stated income backed by business documents, instead of the net figure at the bottom of your T1. "Reasonable" matters here. The lender or insurer compares your stated income to what someone in your industry, at your size, would likely earn, and your number has to hold up.

You'll typically need:

• 6 to 12 months of business bank statements showing revenue coming in.
• A business licence, incorporation documents or GST registration showing the business is established.
• Usually 2 years in business, sometimes less if you were previously employed doing the same work.
• Clean credit. These programs are flexible on documents, not on credit.
• Often a larger down payment. 10% is a common minimum, and more helps.

CMHC and the private insurers both run self-employed programs, so these mortgages are usually insured and placed with an A lender. The rate is usually a fraction of a point higher than a traditional file, and the insurance premium on an insured business-for-self file may be slightly higher than the standard premium.

Most Alberta small-business owners should start here. It costs much less than route 3.

Route 3: alternative lenders

If the tax returns aren't there, the business is young or your credit needs repair, the remaining route is an alternative (B) lender, or in some cases a private lender.

In practice, that means:

• A higher rate than an A lender, though far below a private mortgage.
• A lender fee, commonly around 1% of the mortgage, and often a brokerage fee as well. In Alberta, RECA requires both to be disclosed in writing and agreed to before any application is submitted.
• A larger down payment, usually 20% minimum and often more.
• A shorter term, often 1 or 2 years.

An alternative mortgage is meant to be temporary. You take it for a year or two while your second full year of filed income comes in or your credit recovers, and then you move to an A lender at a normal rate.

That plan needs a specific, dated exit. Without one, you can stay on the expensive mortgage much longer than you meant to. Before you sign a B-lender commitment, you should know what has to be true in 18 months for you to leave, and how you'll get there.

Alberta income types lenders treat differently

National lender policies handle some common Alberta income types inconsistently. Knowing which lender does what with each one is most of the work on these files.

Rotational and camp work. Two-and-two, three-and-one, fly-in fly-out. The income is often excellent, but the pattern can make an automated system hesitate. Lenders differ on whether they average it, whether they need 2 years of it, and how they treat a change of operator on the same rotation. Several treat it as ordinary full-time employment with the right letter.

Oil and gas contract work. Being an employee with a T4 or a contractor invoicing through a corporation puts you on a completely different route, and many people in this sector have been both within 3 years.

Commission sales. Lenders average 2 years, with tax returns to back it up. A strong recent year won't make up for a weak prior year. Some lenders will give the most recent year more weight if your income is trending up.

Incorporated trades. This is the most common self-employed file in Alberta. Add-backs matter a lot here, and so does whether the corporation keeps earnings.

Farm and acreage income. This is underwritten differently again, and it often comes with a rural property that has its own lending rules. Most lenders value only about 10 acres plus the house and outbuildings, and non-urban sliding-scale rules apply above roughly 5 acres.

None of these are problems, but the choice of lender matters more than usual. A branch can only tell you what its own lender does with rotational income. A broker can compare several.

What to do 18 months before you buy

If you're planning to buy in a year or two, this is the planning that pays off most, and nearly all of it is free.

1. Talk to your accountant and your broker together. Do it before your returns are filed. The best declared income for a mortgage is higher than the best declared income for tax, and someone has to weigh that trade-off on purpose.
2. File on time, 2 years running. A late filing removes a year of usable income from the calculation.
3. Clear any CRA balance. Arrears stop most A-lender files, however strong the rest of the file is.
4. Keep business and personal banking separate. Mixed accounts make a business-for-self file much harder to document.
5. Keep your corporate financial statements up to date. Lenders want an accountant-prepared year-end.
6. Protect your credit. Keep 2 active tradelines with 2 years of history, nothing in collections, and your credit use under 30%.
7. Don't restructure the business right before you apply. A new corporation resets your history, even if the work hasn't changed.

Most self-employed borrowers who do these 7 things qualify on route 1, at the same rate as an employee.