High-Ratio Mortgage for Self-Employed Workers in Quebec

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High-Ratio Mortgage for Self-Employed Workers: Complete Guide

Self-employed workers represent a growing share of the Canadian workforce, but obtaining a high-ratio mortgage remains a more complex process than for salaried employees. The main difficulty lies in income verification: self-employed workers legitimately optimize their tax deductions, which reduces their declared net income and, consequently, the loan amount for which they can qualify under standard lender criteria.

The B-20 Guideline and the Stress Test

OSFI's B-20 guideline applies uniformly to all borrowers, including self-employed workers. For an insured loan (high ratio), the borrower must qualify at the higher of the contract rate plus 2% and the floor rate set by the Bank of Canada (currently 5.25%). This stress test ensures the borrower can withstand future rate increases. For the self-employed, the challenge is that this test is applied to an income that is often lower than their actual financial capacity due to tax deductions.

High-Ratio Mortgage: A mortgage loan where the down payment is less than 20% of the purchase price, bringing the loan-to-value ratio above 80%. This type of loan mandatorily requires mortgage insurance (CMHC, Sagen, or Canada Guaranty), with the premium added to the loan amount. The minimum down payment is 5% on the first $500,000 and 10% on the portion above that.

Specialized Programs for Self-Employed Workers

Standard Declared Income Program: The lender uses the average of CRA notices of assessment from the last two or three years. This is the most common approach among Category A lenders. The qualifying income is the net income after business deductions, as declared on T1 returns.
Reasonable Stated Income Program: Some lenders allow the self-employed worker to declare an income consistent with their industry, verified by the lender as reasonable. This program generally requires excellent credit (score of 700+), a minimum of two years of proven business activity, and a stable income history.
Expense Add-Back Program (Gross-Up): Some lenders add a portion of non-recurring business expenses (dépréciation, home office costs, vehicle expenses) to net income to better reflect the self-employed worker's actual financial capacity. The add-back percentage varies by lender.
Alternative Lender Option (B-Lender): If qualification with an A lender is not possible, Category B lenders offer more flexible criteria but generally require a minimum 20% down payment (no high ratio). Rates are 1% to 3% higher, with additional application fees.

Essential Documents for the Application

CRA notices of assessment for the last two or three fiscal years, confirming declared income and no outstanding balance.
Complete T1 tax returns with all relevant schedules (T2125 for sole proprietorships, T4 if corporate income is distributed).
Business financial statements (balance sheet and income statement) prepared by a chartered professional accountant, if available.
Proof of business registration with the Quebec Enterprise Registrar (NEQ) or certificate of incorporation, demonstrating a history of at least two years.
Bank statements for business and personal accounts for the last three to six months to confirm cash flow.
Current business contracts or agreements demonstrating continuity of anticipated revenue.

Frequently Asked Questions

Can a self-employed worker get a high-ratio mortgage with less than 20% down?

Yes, it is possible, but the criteria are stricter. The self-employed worker must demonstrate stable and sufficient income, generally through the average of the notices of assessment from the last two or three years. Mortgage insurance (CMHC, Sagen, or Canada Guaranty) is mandatory and each insurer has its own requirements. A good credit score (680 and above) and a business history of at least two years are generally required.

How do lenders assess a self-employed worker's income?

Category A lenders primarily use the average of line 15000 (total income) or the relevant line depending on the business type from the CRA notices of assessment for the last two or three years. Business deductions reduce declared net income, which can limit the qualifying loan amount. Some lenders allow the addition of certain non-recurring expenses to income for the mortgage calculation.

What is a reasonable stated income program?

A reasonable stated income program allows the self-employed worker to declare an income consistent with their industry and business type, rather than being strictly limited to their fiscal net income. The lender verifies that the declared income is reasonable for the sector of activity. These programs generally require excellent credit (700+), a minimum of two years of business activity, and sometimes a higher down payment.

Does the B-20 guideline apply differently to self-employed workers?

The B-20 guideline applies the same way to all borrowers for the stress test. The difference lies in the method of calculating qualifying income: OSFI requires lenders to rigorously verify self-employed income, which complicates qualification. The stress test itself (contract rate + 2% or floor rate) remains identical.

What documents must a self-employed worker provide for a mortgage application?

Required documents generally include CRA notices of assessment for the last two or three years, complete T1 tax returns, business financial statements, proof of registration or incorporation, business bank account statements, and sometimes a letter from an accountant confirming business viability.

Are there alternative lenders for self-employed workers who don't qualify with an A lender?

Yes, Category B lenders (alternative lenders) offer more flexible programs for self-employed workers who do not meet A lender criteria. These lenders generally require a minimum 20% down payment (so no high ratio), but are more flexible in income assessment. Rates are higher, typically 1% to 3% above A lender rates.