You built a business, you pay your bills on time, and you have a healthy income. Then you apply for a mortgage and the bank tells you that you qualify for far less than you expected. If that sounds familiar, you are not alone. Getting a self employed mortgage in Alberta works differently than it does for someone with a T4, and knowing how lenders look at your income makes a big difference.
Many of our self-employed clients are also buying acreages near Red Deer, where a shop on the property doubles as a home base for the business. Whether you are buying in the country or in the city, the income rules below apply.
The Write-Off Problem
Business owners work hard to reduce their taxable income. Your accountant claims every legitimate expense, and that is smart tax planning. The trouble is that most lenders start with the income on your tax return. If your business brought in $180,000 but your taxable income after expenses was $55,000, a traditional lender may qualify you based on something close to $55,000.
That gap between what you earn and what your tax return shows is the most common reason self-employed borrowers get turned down or approved for less.
What Lenders Usually Ask For
Most lenders want to see a two-year history of self-employed income. Expect to provide:
Your last two years of T1 General tax returns.
Your last two years of Notices of Assessment from the CRA.
Proof that your business is active, such as a business licence, GST registration or articles of incorporation.
Financial statements for the last two years if you are incorporated.
Proof that you have no taxes owing to the CRA, or a plan to pay them.
Lenders usually average your income over those two years. If your income dropped in the most recent year, many will use the lower number.
How Incorporated Owners Are Treated
If your business is incorporated, lenders look at the salary and dividends you pay yourself. Some lenders will also consider part of the income left in the corporation, especially if the business is well established. How this is presented to the lender matters, which is where an experienced broker earns their keep.
Options When Your Tax Return Does Not Tell the Whole Story
If your taxable income is lower than your real earning power, you still have options:
Business-for-self programs: some lenders and mortgage insurers offer programs that look at reasonable income for your industry, supported by bank statements and your business history.
Alternative lenders: credit unions, monoline lenders and B lenders may use bank statements or a stated income approach. These often need a larger down payment and may carry a higher rate.
Short-term bridge solutions: some borrowers use an alternative lender for one term, then move to a traditional lender once their tax returns support a better rate.
Buying a Higher-Value Home
Many of Jean-Guy's luxury home clients are self-employed. If you are buying above $1.5 million, mortgage insurance is not available, so you will need at least 20% down. At that level, the way your income and assets are presented becomes even more important, and having access to many lenders gives you more room to find the right fit. Learn more about high net worth mortgages in Red Deer and how Jean-Guy structures them.
Tips to Strengthen Your Application
Plan ahead: if you know you want to buy in the next two years, talk to your accountant and a mortgage broker together about how your income will be reported.
Stay current with the CRA: taxes owing can stop an approval.
Keep business and personal finances separate: clean records make your income easier to verify.
Protect your credit: pay personal and business cards on time and keep balances reasonable.