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Banks have a well-known bias and if you’re a contractor or any small business owner, you’ve probably felt it. Traditional lenders often hesitate to work with self-employed borrowers. Whether you’re a tradesperson, freelancer, or entrepreneur, you’re typically grouped into one category: Business For Self (BFS). And that’s where the problem starts.The income problem
When banks assess BFS applicants, they don’t look at what you actually earn. They focus on your net income after write-offs, which is often much lower on paper than reality. That’s great for tax savings. But when it’s time to qualify for a mortgage, it can seriously limit how much you can borrow.
You’re left with a frustrating trade-off:
- Report lower income, pay less tax but qualify for less mortgage, or;
- Report higher income, pay more tax and qualify for more mortgage.
Paying tens of thousands more in taxes just to satisfy a lender isn’t exactly appealing.
The good news: you have options
The bank isn’t your only choice and, in many cases, it’s not even the best one. Alternative lenders (often called “B” lenders) are a strong option for BFS borrowers. Their rates are often comparable to traditional banks, with one key difference: a lender fee, typically around one percent. For example, a $500,000 mortgage at five percent charges $25,000 per year in interest, plus a one-percent lender fee $5,000 one-time cost. Spread that fee over a three-year term, and it’s roughly an extra 0.33 percent per year – a relatively small price for getting approved without inflating your income. For many, that trade-off makes far more sense than paying significantly more in taxes.
Other ways to qualify
There are also several strategies that can help BFS borrowers qualify through traditional lenders:
- Income gross-ups;
- Debt restructuring;
- Using benefits (like child tax income);
- Spousal income;
- Co-signers.
But navigating these options requires experience. This isn’t something most bank branches specialize in – you’re far better off working with a knowledgeable mortgage broker who understands self-employed income.
The “stated income” advantage
One of the most popular solutions for contractors is the stated income program. Instead of relying strictly on your tax returns, lenders look at your actual cash flow, reviewing six to 12 months of bank statements. They estimate your expenses and arrive at a more realistic income figure.
Yes, rates can be slightly higher, but often not by much.
Equity changes everything
If you can bring a 35 percent down payment or show strong liquid assets, lenders become far more flexible. Equity reduces their risk and increases your options.
The bottom line
Being self-employed comes with major perks: tax flexibility, independence and yes, even the occasional weekday golf round. But when it comes to mortgages, you can’t optimize for both minimum taxes and maximum borrowing power at the same time. If you choose to keep your taxable income low (which many do), be prepared to pay slightly higher borrowing costs. That’s not a failure – it’s just the reality of how the system works.
About the author
Bryan Sutter is an independent mortgage broker with Real Mortgage Associates. He managed the top-performing mortgage team in Canada for a large bank and has over 25 years’ experience finding solutions for tough lending challenges. bs*****@*******er.ca