CMHC Self-Employment Qualification Updates

On Monday, October 7, new guidelines from Canada Mortgage and Housing Corp. (CMHC) came into effect that could make it easier for self-employed individuals to qualify for mortgage financing.

The changes apply to individuals who have put down a down payment of 20 percent or less, as well as all mortgages not already insured under the 20 percent down payment rule.

Under these new guidelines, lenders will be given more flexibility when it comes to providing mortgage financing for self-employed individuals. The options will allow them to assess a broader array of variables when determining self-employed individuals' qualification for a mortgage.

Prior to the changes, it was difficult for self-employed individuals to obtain mortgage financing. Some could not meet the qualifications at all, despite having adequate savings and low expenses, while others would be forced to seek out financing from alternative lenders, who would aptly charge them higher interest rates, due to their perception as being a high-risk borrower.

Currently, some 15 percent of Canadians fall into the self-employed category. Small-business owner, doctors, dentist, lawyers, financial advisors, artists, and entrepreneurs are all considered to be self-employed.

In addition, the burgeoning "gig" economy has given rise to a considerable number of people who work on a project by project basis.

One of the noticeable aspects of this type of work is the absence of a predictable and consistent income stream; uncertainty and dramatic swings in earnings are common. Unfortunately, words like "uncertainty" elicit feelings of trepidation among lenders, who instead, favour lending to borrowers whose source of income is marked by predictability and consistency.

Now, lenders will be able to more closely assess the financial risk of a prospective borrower. They will be able to take a more holistic approach, scrutinizing borrowers' cash reserves, potential future earnings, whether the business they are operating is a startup or acquisition, their education level, previous training, history of credit management, etc.

Self-employed individuals will now be able to submit a wider range of documentation to help satisfy income and employment requirements. Those documents include a Notice of Assessment (NOA), T1, CRA Proof of Income Statements, and the Statement of Business or Professional Activities (form T2125).

The guidelines will also enable lenders to extend financing to self-employed borrowers who have been running a business for less than 24 months, if it can be established the borrower has a low-risk profile.

The CMHC Guidelines are not regulations, so lenders will still be able to exercise their own judgement on a case-by-case basis. However, they will finally allow self-employed individuals a chance to obtain reasonable and affordable mortgage financing.

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