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More than 2.6 million Canadians identify as self-employed, according to Statistics Canada, highlighting the growing presence of freelancers, business owners, and gig workers across the country. Yet, for many, the dream of homeownership remains challenging due to strict mortgage requirements that often favour salaried employees.
Self-employed individuals face unique challenges when applying for a mortgage, including:
- Difficulty proving consistent income: Without traditional pay stubs, self-employed applicants must provide alternative documentation that can complicate the process.
- Stricter qualification criteria: Many lenders have higher standards for self-employed borrowers.
- Potentially higher down payment requirements: To offset perceived risk, lenders often require a larger down payment.
- More stringent stress test evaluations: Self-employed buyers may need to pass a more rigorous stress test to qualify.
This guide explores mortgage options for self-employed individuals, practical ways to improve eligibility, and trending alternatives such as rent-to-own programs. With preparation and the right resources, freelancers, business owners, and independent contractors can find paths to homeownership.
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Challenges Faced By Self-Employed Buyers
Self-employed individuals, including freelancers, contractors, small business owners, truck drivers, and gig workers, often encounter unique challenges when applying for a traditional mortgage. Lenders consider these borrowers higher risk due to inconsistent income and the lack of traditional pay stubs, which complicates income verification.
For example, getting a mortgage as a truck driver can be particularly difficult due to the variable income that is often tied to fluctuating contracts or seasonal demand. This income variability can make securing a truck driver mortgage challenging, as lenders typically look for consistent, easily verifiable income sources. Unlike salaried employees, who can provide straightforward pay stubs, self-employed individuals often use complex documentation, and tax deductions can reduce reported income, further impacting eligibility.
Lenders also closely examine the credit history and scores of self-employed borrowers, often requiring additional documents like profit and loss statements, business licenses, and financial records. These added requirements can make the mortgage process more demanding for self-employed applicants, leading to a lengthier and more stressful application experience.
Disadvantages self-employed individuals face when applying for traditional mortgages
These factors contribute to mortgage stress for self-employed individuals compared to salaried employees.
Requirements for Buying a Home When You're Self-Employed
Buying a home as a self-employed individual requires careful preparation and documentation. Lenders assess self-employed borrowers using different criteria than those for salaried employees, making it essential to emphasize alternative factors that indicate financial stability. By addressing these criteria effectively, you can enhance your likelihood of mortgage approval and streamline the application experience.
1. An Excellent Credit Score
A credit score above 660 is generally considered good and is important for self-employed individuals seeking to buy a home. It signifies financial reliability and can offset lower declared income. Lenders might offer flexible terms based on your credit score even if you have less than two years of self-employment. Therefore, learning how to improve your credit score as well as maintaining a strong credit score will improve your chances of becoming a self-employed homebuyer.
Read more about how to get a credit report
2. Low Debt-to-Income Ratio
Lenders scrutinize debt-to-income (DTI) ratios to assess an applicant's capacity to manage mortgage payments. Self-employed individuals should maintain meticulous records of both business and personal finances. While the Gross Debt Service (GDS) ratio should not exceed 39%, the Total Debt Service (TDS) ratio should be under 44% of gross income for mortgage approval. Lenders might consider lower DTI ratios if proof of consistent income is provided or a co-signer is used.
3. Sizeable Down Payment
A minimum down payment is essential, with at least 20% typically required by major Canadian banks unless mortgage default insurance is obtained. Programs like CMHC’s Self Employed allow for a 5% down payment on the first $500,000 of the purchase price. Down payments can come from savings, property sales, or gifts, but if below 20%, insurance is often necessary. Different institutions, like RBC, TD, National Bank and Scotiabank, have specific down payment requirements for self-employed borrowers.
How Self-Employed Individuals Can Buy a Home
Self-employed individuals have several pathways to becoming first-time homebuyers, including traditional and alternative lenders as well as rent-to-own programs. While banks and credit unions offer mortgage options for self-employed borrowers, these typically come with stricter requirements. In contrast, “B” lenders and private lenders often provide more flexible terms, though usually at higher interest rates.
Additionally, rent-to-own programs offer a practical alternative for self-employed individuals who may struggle to qualify for traditional financing. By understanding the differences among “A” lenders (banks and credit unions), “B” lenders (subprime lenders), private lenders, and rent-to-own options, self-employed borrowers can find a solution that best aligns with their financial profile and goals.
Self-Employed Mortgages
Self-employed mortgages are tailored for self-employed individuals, such as business owners or sole proprietors, who often have irregular income streams. Unlike traditional mortgages obtained by salaried employees, self-employed borrowers must provide more comprehensive financial documentation to secure a loan. This may include bank statements, proof of income, and personal income tax returns to establish their financial health.
The key difference between self-employed mortgages and traditional mortgages lies in the documentation requirements. While salaried employees typically submit payslips and tax forms, self-employed workers need to provide financial statements, a business license, and possibly a stated income mortgage declaration. Mortgage lenders may also assess business financials to gauge future income stability.
Challenges for self-employed mortgage applicants include potential mortgage stress and meeting a minimum credit score, which ensures a favourable credit history. Private lenders and mortgage brokers can offer more flexibility compared to traditional banks, sometimes bypassing standard criteria with mortgage default insurance. Ensuring a solid credit score and thorough documentation of income will significantly improve chances of approval for self-employed mortgages.
A Lenders: Conventional Loans
Conventional mortgages are the go-to choice for many, including self-employed individuals. However, they require thorough income verification, such as T4 slips and Notices of Assessment (NOA) from the past two years.
These mortgages typically offer lower interest rates compared to B lenders or private lenders but demand a higher credit score and proof of stable income. Despite these challenges, consistent income history can make these loans accessible to self-employed borrowers.
B Lenders: Subprime Loans
B lenders, or subprime lenders, provide more flexible lending criteria than traditional A lenders, making them appealing to those who struggle to meet standard qualifications. Although they involve higher interest rates—generally 0.5% to 1% more—self-employed borrowers can use bank statements or work contracts as proof of income. B lenders might require a larger down payment, often 20%, but they offer a viable path for those who might otherwise face hurdles with conventional lenders.
Private Lenders: High Interest Private Mortgages
Private lenders and private mortgages serve as a last-resort option, particularly for those unable to secure a loan from A or B lenders. With interest rates ranging from 7% to 18%, these loans are expensive, often accompanied by extra broker and loan set-up fees of 1% to 3% of the property value. These lenders have a less stringent approval process and focus more on the property value and borrower’s creditworthiness, offering an alternative despite higher costs.
Rent-to-Own Programs: A Highly Accessible Alternative for Self-Employed Buyers
For self-employed individuals facing traditional mortgage challenges, rent-to-own (also known as lease-to-own) offers a compelling, flexible path to homeownership. With a rent-to-own contract, you lease a home with the option to buy it later, making it possible to start building equity even if you don’t yet qualify for a conventional mortgage.
Unlike conventional options, rent-to-own doesn’t require extensive income verification or a large down payment. Requity Homes' rent-to-own program only requires a minimum down payment of $5,000.
Rent-to-own can also help you build credit by giving you the time needed to improve your credit score.
Ultimately, rent-to-own offers peace of mind and security, allowing you to live in your future home while strengthening your financial profile on a timeline that works for you. It’s an appealing solution for business owners, freelancers, and gig workers who are ready to invest in a home but face challenges with traditional financing. For self-employed buyers, rent-to-own stands out as an accessible, affordable, and strategic path toward homeownership.
Use this rent-to-own affordability calculator to see how much you can afford.
Once you know your budget, check out our guide on finding "rent-to-own listings near me".
Tips to Prepare for Mortgage Pre-Qualification as a Self-Employed Individual
To increase your chances of mortgage approval as a self-employed borrower, careful preparation is key. Since lenders look for steady income over 2-3 years, gathering organized and clear financial documentation is essential.
Here are some actionable tips to prepare for a mortgage pre-approval:
- Organize comprehensive documentation: Gather financial statements, tax returns, and bank statements that clearly reflect your net income and business stability. For those newly self-employed, programs like CMHC can help, allowing qualification with less than two years of self-employment if you can demonstrate income through contracts and bank statements.
- Maintain a strong credit score: A good credit score demonstrates reliability and can improve your mortgage terms. Consider pre-approval to lock in rates for up to four months, which strengthens your position as a borrower.
- Minimize tax deductions where possible: While deductions reduce taxable income, they can also lower reported income, impacting mortgage eligibility. Aim to balance tax savings with borrowing goals.
Proving Your Income: Methods for Self-Employed Borrowers
Proving income as a self-employed individual often requires multiple approaches. Here’s a breakdown of the most common methods:
Traditional Income Verification
Traditional income verification is ideal for those who can substantiate their earnings with pay stubs and employment verification letters. This method requires self-employed individuals to authenticate their income via personal tax returns. While it's less common for self-employed people to meet these criteria, those who do can benefit from loans with low down payments and competitive interest rates. Lenders see this as the least risky option.
Non-Traditional Income Verification
Non-traditional income verification is a more feasible option for many self-employed borrowers. It involves using business financial statements and bank statements to prove income, bypassing the need for standard payroll documentation. Despite offering a practical alternative, this method often results in slightly higher mortgage rates and may require mortgage default insurance. Applicants may need to provide profit and loss statements and proof of GST/HST payments, resulting in higher down payments and potential rate increases compared to traditional verification.
Using Stated Income as an Option
Stated income mortgages offer self-employed individuals the flexibility to declare their income without traditional documentation. While this option simplifies the process, it carries higher risks for lenders, reflected in larger down payment requirements of 20-35% and elevated interest rates. Although higher risk, lenders accepting stated income may consider alternative verifications like business contracts or bank statements. Stated income mortgages can also be used for refinancing, debt consolidation, or covering other personal expenses, beyond just home purchasing.
Achieve Homeownership on Your Terms with Requity Homes
For self-employed individuals, homeownership doesn’t need to be complicated or out of reach. Requity Homes’ rent-to-own program offers a flexible, empowering alternative, designed to overcome the challenges of traditional mortgages.
With Requity Homes’ rent-to-own program, you can move into your future home right away, with a portion of your rent contributing toward your down payment. Requity covers all upfront closing costs, including property taxes, legal fees, and title insurance, making it easier to focus on saving for your purchase while living in the home you want to buy.
Here’s how rent-to-own works:
- Apply and Pre-Qualify: Check your eligibility and determine your budget in just 24 hours—without impacting your credit score. Requity serves Ontario, Alberta, Saskatchewan, and Manitoba.
- Find Your Dream Home: Once approved, browse rent-to-own listings with help from partner agents or your realtor. Requity buys it for you.
- Move In and Save: Begin renting your chosen home at a fixed monthly rate, with a portion of each payment going toward your down payment savings.
- Buy Your Home: When you’re mortgage-ready, you can purchase the home from Requity at a pre-set price—or walk away with your accumulated savings.
Why Rent-to-Own with Requity Homes?
- Low Initial Deposit: Start with a minimum down payment of $5,000, adjustable based on your profile.
- Income Flexibility: Requity welcomes self-employed and gig workers without strict income history requirements, focusing on your potential rather than conventional credit metrics.
- Built-In Savings: Part of your monthly payment goes toward your down payment, helping you reach homeownership faster.
- Guaranteed Stability: No unexpected moves—your home won’t be sold or your lease terminated during the program.
Requity Homes is not a mortgage provider, which means there are no interest rates during the rent-to-own lease term. Once you’re ready, Requity helps you transition to a mortgage, putting you in control of your path to homeownership. For self-employed Canadians, this program is an accessible, empowering solution for owning a home on your own terms.
Get pre-qualified to rent-to-own with Requity Homes in minutes - it's free to get started, no obligation.
