Pro:  Claiming expenses.  

Con: Getting a mortgage is tricky!!   

Ironically, claiming expenses is a reason why getting a mortgage is tricky!!  

Expenses: Why they hurt your mortgage application

The ability to claim expenses is great!  The more expenses you have, the less income tax you pay to CRA!! It’s a good deal, except when you’re qualifying for a mortgage.  In a mortgage pre-approval, the more income you have, the higher the pre-approval.

A rough rule of thumb, $50K of income qualifies for +/- $250K home ($100K income = +/-$500K home - this depends on a bunch of factors like down-payment & debts)

Mortgage Rule: You must be in business for at least 2 years.  

Lenders want to see consistent income  from your business.  How long is consistent?  2 years.

On a mortgage application, we use the average of the past 2 years as income.   Example, if Jo shows  $50K in 2020 and $70K in 2021,  the income we consider on Jo’s application is $60K (the average of 2020 & 2021).

The paperwork is a doozy!  

For an employed person (someone who has a job & a boss), the paperwork required is easy-peasy: a job letter & paystubs (& maybe a T4).

However, for a self-employed biz owner,  the paperwork is a little more elaborate. As mentioned, we need 2 years history, so we need to collect:

• Last 2 years T1 generals (the 20-40 page documents prepared by an accountant)

• Last 2 years NOA (Notice of Assessment)

• Proof that you don’t owe any taxes to CRA

• Article of Incorporation (for corporations)

Comparing Apples to Oranges 

When we look at  Employed income vs. Self-Employed, it’s comparing apples to oranges.

A biz owner will claim their business expenses which includes a portion of their “regular living expenses” like housing costs, their vehicle expenses, cell phone, internet….  After the biz owner has paid all their expenses, the “leftover” is the income we consider on their mortgage application.

For an employed person, we look at their gross income. Period. No expenses considered.

Basically, we look at the income AFTER the biz owner has paid some of their living expenses and for the employed person we look at their income BEFORE they pay their living expenses.

Tip for Pre-Approval for Biz Owners 

In the 2 years prior to purchasing a new home, limit your expenses!  You might have to pay more taxes to CRA for those 2 years, but you’ll get a bigger pre-approval… which affects the many years ahead.  The extra taxes for 2 years might be well-worth it! 

If you’re a biz owner looking for a mortgage,  I can help!  Shoot me an natalie@homemortgage.ca

Hope that was helpful!

Nat