Intro to income for the self-employed

At what point are you classified as self-employed?

Given the rise of social media and technology, it’s never been easier for someone to start their own business. But at what point does your side-hustle go from basement start-up to your primary source of income? As exciting as starting your own business can be, it can also complicate your mortgage approval. In this post, we give an intro to income for the self-employed.

This is a question we see more and more frequently as of late, with the percentage of self-employed Canadians continuously rising. 2.8 million Canadians were self-employed at the end of 2018 according to Statistics Canada. That’s nearly 15 per cent of the labour force! Keep in mind that this number can be hard to accurately calculate, given the relatively “loose” definitions of self-employed. This can consist of full-on entrepreneurs running a business, freelancers, startup founders, etc. Regardless of your classification, this number continues to grow year over year and doesn’t appear to be slowing down anytime soon.

So when should you classify yourself as “self-employed?”

You’re considered self-employed if you fit into one of the following categories:

• You own your own business, either incorporated or sole proprietor or partner
• You’re responsible for the payment of your income taxes
• You work under contract with your employer, and they do not deduct income taxes from your pay

When it comes to mortgages for the self-employed, you need to exercise extra caution and vigilance with your finances. Regardless of how successful your business is, most lenders view self-employment as a negative factor in assessing your overall creditworthiness. This creates the need for increased awareness when it comes to your credit score, assets, and debt. A self-employed applicant seeking a loan needs to determine their qualified income, to adequately demonstrate their ability to repay the loan they’re borrowing.

Different types of income

For the self-employed there are typically two types of acceptable qualifying income when you’re applying for a mortgage:

Verifiable income: You can qualify using the income you report to the government and pay taxes on. Providing the past two recent tax filings typically serves as sufficient proof. To avoid any issues, you should ensure that the income amount is verified from an independent source, challenging to falsify and that the income verification info does not contradict other information provided by the borrower in the underwriting process

Stated income: Stating your income at a reasonable level for your occupation and industry experience without having to provide proof. To qualify for the stated income program you may need to provide supporting documents.

If you’re looking to qualify for a mortgage under a Stated Income program, you are required to have at least a 10 per cent down payment. With less than a 20 per cent down payment, a strong credit score and history would be necessary to get approved underinsured self-employment mortgage programs.

We can help!

Still have questions about Income for the self-employed, and how they related to mortgages? You’re not alone. It can certainly be a confusing topic, which is why our doors are always open to talk about your self-employed financial picture. You can get in touch with us here.