In 1987 I presented a business plan to RBC and was able to start my first business with a $25,000 loan. That company grew to 8 million in annual revenue with 13 employees and I sold it 10 years later. It still operates today, though owned by an American outfit. A few years after it opened I went to secure a mortgage to buy a home and was turned down. They didn’t like the financials. I quickly learned the intricacies of securing financing as a small business owner. The good news is another bank did like the numbers and I bought the house. I hope this article sheds some light on the challenges and protocols involved with getting lending as a small business owner.
Navigating Home Financing as a Self-Employed Business Owner in Ontario
Securing a mortgage is a significant milestone for many, but for self-employed business owners in Ontario, this process can present unique challenges. Traditional lenders often view self-employed individuals as higher-risk borrowers due to income variability and unconventional documentation. However, with the right strategies and knowledge, obtaining home financing is entirely achievable.
Challenges in Securing Conventional Mortgages
- Income Verification Difficulties: Unlike salaried employees who can provide pay stubs and T4 slips, self-employed individuals must furnish extensive documentation to prove consistent income. Lenders typically require at least two years of personal and business tax returns, profit and loss statements, and bank statements to assess income stability.
- Income Variability: Self-employment often involves fluctuating earnings, which can make lenders cautious. They prefer borrowers with stable or increasing income, and significant variations may raise concerns about the ability to meet mortgage obligations.
- Impact of Expense Deductions: While claiming business expenses reduces taxable income, it can also lower the income considered by lenders for mortgage qualification. This reduction may affect debt-to-income ratios and borrowing capacity.
- Stringent Credit Evaluations: Lenders may apply more rigorous credit evaluations to self-employed applicants. Maintaining a strong credit score and a healthy debt-to-income ratio is essential to enhance mortgage approval prospects.
Alternative Financing Options
Given these challenges, self-employed individuals might consider alternative mortgage solutions:
- Stated Income Mortgages: These allow borrowers to declare their income without extensive traditional documentation. Lenders may accept a reasonable stated income based on industry and experience, supplemented by bank statements or invoices as verification. However, these loans often come with higher interest rates and may require a larger down payment, typically a minimum of 10%.
- Bank Statement Programs: Some lenders assess income based on 12 to 24 months of personal and business bank statements, focusing on cash flow rather than tax returns. This approach can be advantageous if you have significant business expenses that reduce your taxable income. To qualify, a credit score of at least 620–680 is often required, along with a down payment between 10–20%.
- Alternative (B) Lenders: These lenders offer more flexibility with income verification and may accept borrowers with inconsistent income or lower credit scores. While their interest rates are higher than those of prime lenders, they can provide exceptions on debt-to-income ratios if the borrower lacks personal income when registered as a corporation.
- Private Mortgages: Funded by private investors or companies, these loans offer flexible approval criteria, focusing more on the property’s value and less on traditional income verification. However, they usually come with higher interest rates and fees and may require a larger down payment. Private mortgages are typically a temporary financing solution and need an exit strategy.
- Mortgage Insurer Programs: In Canada, some mortgage insurance providers have developed specific programs tailored to self-employed borrowers. These programs often include special criteria for verifying income and provide mortgage insurance for those who may not qualify under traditional mortgage lending guidelines.
Strategies to Enhance Mortgage Approval Prospects
To improve the likelihood of securing a mortgage, self-employed individuals should consider the following steps:
- Maintain Meticulous Financial Records: Keeping detailed and organized financial documents, including tax returns, profit and loss statements, and bank statements, is crucial. This transparency demonstrates financial stability to potential lenders.
- Limit Expense Deductions Pre-Application: In the years leading up to a mortgage application, consider minimizing business expense deductions to reflect a higher net income. This strategy can enhance your debt-to-income ratio, making you a more attractive borrower.
- Consult with Mortgage Professionals: Engaging with mortgage brokers or financial advisors experienced in self-employed lending can provide personalized guidance. They can connect you with lenders who understand the nuances of self-employment income and offer suitable mortgage products.
- Strengthen Your Credit Profile: Regularly monitor your credit report, address any discrepancies, and aim to maintain a high credit score. A strong credit history can offset some concerns lenders may have about income variability.
- Consider Paying Yourself a Salary: If your business structure allows, paying yourself a regular salary can provide consistent income documentation, aligning more closely with traditional employment income in the eyes of lenders. However, consult with a tax professional to understand the implications for your specific situation.
Conclusion
While self-employed individuals in Ontario may face additional hurdles in securing home financing, understanding these challenges and exploring alternative mortgage options can pave the way to homeownership. By maintaining thorough financial records, considering alternative lenders, and seeking professional advice, self-employed business owners can enhance their chances of mortgage approval and achieve their homeownership goals.
What’s Next?
At Willows Realty Group we maintain a solid stable of experienced, hand-chosen mortgage advisors who have years of experience working with small business owners and the self-employed. Reach out. We’re happy to put you in touch. Call me direct at 905-903-9250 or email to: keith@willowsgroup.ca.

Stay connected to the market.
Sign up to our digital newsletter community.