If you’re self-employed, hustling is a way of life: managing multiple income streams, such as commissioning short-term consulting contracts, selling unique products online, or balancing independent contractor work with providing professional services.

And yet, you’ve probably wondered whether—in spite of all your hard work—you’ll ever be able to take some of the major financial steps many self-employed individuals take as a matter of course. Buying a house or condo, for example. When was the last time you heard about a financial institution that wanted to give a contractor a mortgage?

Qualifying for a mortgage when you are self-employed is not only possible, it’s not nearly as difficult or unusual as you might think. Let’s take a look at five major factors that will influence the qualifying process.

Down payment

“Most people think that, as self-employed individuals, they are going to have to make a huge down payment or pay unspeakably high interest rates,” says Isabelle Hebert, a culture banker at ATB. “That might be true through some financial institutions, but I can guarantee it is not the case with ATB.”

While the size of your down payment does matter, those who are self-employed have the same down payment options as any other home buyer.

There are two basic types of mortgage: conventional (or uninsured) mortgages, which have down payments of 20 per cent or more, and insured mortgages, which have down payments between 5 and 20 per cent.

This means that you may only have to come up with five per cent of the purchase price of your future home (just remember that insured mortgages require an insurer’s approval as well as a bank’s approval).

Income

A big part of qualifying for a mortgage is being able to demonstrate that you can afford to make mortgage payments, which means being able to prove your income. For a self-employed person, that may not be as simple as producing a T4 slip or a pay stub.

If you have a day job (or if your spouse has a day job), that salary might be sufficient to qualify you for a mortgage. But if the bulk of your income comes from independent sales or some form of contract work, your average income over the past two years is probably the best metric by which to judge whether or not you can afford a mortgage.

So how do you prove your average income over two years when you’ve been paid in cash, cheques, grants, free drinks, and e-transfers?

The most important documents required to your financial institution are your most recent 2 years of T1 Income Tax Return with corresponding NOA (Notice of Assessment). 

“For income verification purposes, a T1 Income Tax Return and a Notice of Assessment go together like salt and pepper because each document provides information that the other doesn’t,” says Fwanyanga Mate, Senior Banking Solutions Manager at ATB Financial. 

For investment income, we will accept your most recent investment statement and your most recent annual tax document. Speak with an ATB team member (or your financial institution) to determine what document you need specifically.

As you’ve probably guessed, you’re going to have to be caught up on filing your income tax. Not only will you need to provide your financial institution with official documents like T1s, you won’t be able to use unclaimed income to qualify for a mortgage.

Sole proprietorship vs. corporation

Whether you’re registered as a sole proprietorship or a shareholder in a corporation will change how your income is assessed.

If you’re a sole proprietor, the two-year average of net income on your T1 Generals might not be enough to qualify for the mortgage you want. Because most business owners maximize deductions to pay less tax, their net income often ends up being significantly lower than their actual cash flow.

If your income falls short of the qualifying threshold, financial institutions have a workaround:

•  The 'Gross-Up': many financial institutions recognize that your taxable income doesn't represent your full buying power. To compensate, an ATB team member may be able to 'gross up' (increase) your reported two-year average net income by 15 per cent for the purpose of your application.

If you’re a shareholder in an incorporated business, qualification works a little differently. We start by using the two-year average of net business income reported on your T1 Generals. However, if that amount isn’t enough to meet the qualifying threshold, there may be additional flexibility available.

Financial institutions can complete a cash flow analysis of your business to determine allowable surplus income for mortgage qualification. This allows an ATB team member to look beyond just taxable income and assess the overall financial strength of the business. In doing so, they may be able to adjust your qualifying income by factoring in items such as interest expenses, amortization, and taxes.

In addition, shareholder payouts averaged over the most recent two years can also be considered as usable income.

To complete this analysis, you’ll need the most recent two years of financial statements prepared by an accountant with a CPA or PBA designation.

Considering transitioning from a sole proprietorship to an incorporated business before house shopping? Make sure you make that decision well in advance. Because financial institutions rely on established financial history, you’ll need at least one full year in business — along with accountant-prepared financial statements — before attempting to qualify.

Keep in mind that incorporating affects every area of your business, from day-to-day operations to the way you file your taxes. “I think ultimately the decision to incorporate needs to be made in conjunction with an accountant, as so much will change above and beyond just the mortgage application,” Hebert says.  

Credit score

Credit scores still play a major role in the mortgage approval process. You’re going to need a score of at least 620 to qualify. 

The good news is that if your score is lower, your financial institution can work with you to improve your credit score and your spending habits. It might take a little longer to qualify for a mortgage, but when you do, you’ll be financially healthier—and better equipped to handle the responsibilities of home ownership

What you can afford

“Walk before you run,” Hebert says. “Get a feel for what kind of mortgage payment you feel comfortable with.” 

While your financial institution can take stock of your finances as they appear on paper, it’s always wise to make a personal assessment of the factors that don’t fit so easily into a spreadsheet: How comfortable are you with limiting your spending to afford mortgage payments? How do you feel about different kinds of debt? How do you expect your income and financial responsibilities to fluctuate over the next few years? Do you have a safety net in place if something unexpected happens that heavily impacts your finances? Your financial institution will be able tell you whether you can qualify for a particular mortgage, but only you can decide whether you should.

For example, co-financing (perhaps with a parent) and borrowed down payments are options that might be available to you, but if your income is not enough to qualify for a mortgage, it might not be wise to put yourself in a position to have to make payments on one.

Whatever your down payment, income, business registration status or credit score, the most important thing to remember is that you, as a self-employed individual, have options when it comes to purchasing a home of your own. And we’re here to make your dreams of ownership a reality.