Mortgages for the self-employed
In 2007, an individual could buy a home with a 0% down-payment. Thinking back to that year (which doesn’t feel so long ago) brings about the joy levels of Christmas! There have been many changes since then, and the process to getting a mortgage has definitely become more involved.
Being self-employed has already equipped us with a range of extra skills – problem-solving and taking things in our stride – are definitely amongst them! With that being said, we’re able to deal with the often turbulent journey getting a mortgage can be. Our aim is to solve that problem for you. Thank you for showing up by watching the webinar, or reading this article, and caring enough to make it happen.
We want you to be well-armed with what you can and can’t do.
It’s important to know and understand how mortgage lenders determine where an applicant is self-employed or not. Here are a few criteria that make you self-employed for mortgage purposes:
For example, independent contractors, contract workers, etc. I.O.W. your employer is not deducting income taxes from their pay.
Owner/shareholder/director of a registered business. Corporations, Partnerships, Sole Proprietors.
Note: If you own a corporation and/or you are a shareholder/director of a company from which you derive an income, even though the corporation provides you with a T4 and the corporation deducts taxes from you, you are still considered self-employed for mortgage purposes.
The business operates under an HST number only, or the business does not have an HST number and is not registered. Even though the business may not be registered, etc. you are still considered self-employed if your income is from business activities.
Note: If your income is 100% commission and your employer does not remit your income taxes to the Canadian Revenue Agency, you are in a special category called “Commission-only”. For example, real estate agents, mortgage agents, etc.
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Basic Mortgage Eligibility Guidelines for Self-Employed Applicants:
Although every lender sets its own lending guidelines, there are few generally accepted, common guidelines. Jacques walked us through the basics:
It’s powerful to be informed around your finances.
It is safe to say that you must have a registered business for at least two years at the time you apply for a mortgage. Some mortgage insurers only require for you to have one year, but as a self-employed individual, we’re sure you would know and agree that it takes a lot longer than one year to start making money and running the business effectively.
As someone who is self-employed, it is even more important that you guard your credit like crazy. Last month’s webinar all-about budgets walked through credit in a lot of detail. You can watch the recording, or read the summary. All applicants must have acceptable credit and their credit scores must exceed 650. Jacques recommends that you keep your credit score above 720. However, if your credit score is below prime mortgage lending requirements, you may still be eligible for an alternative mortgage. We can help you through this!
This is the golden question. Prime mortgage lenders normally determine your mortgage eligibility income from your previous and past years’ personal tax returns. We take the average of two years, so if you’re planning ahead – try and apply for a mortgage around the time where you’ve had two years of good income. You will be required to provide personal and business income documents when on the road to getting a mortgage.
Your personal income taxes must be up to date and paid in full. Unfortunately, no “arrangements” will be considered in the application. It is easy to neglect accounting practices and chase revenue as someone who is self-employed, but we encourage you to keep your finances in order. This will take a lot of pressure of when it comes to achieving big financial milestones such as getting a mortgage.
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Self Employed Lending Programs:
Besides credit, self-employed applicants find it difficult to understand mortgage qualifying income requirements. This section provides you with information about self-employed mortgage programs from an income perspective for regulated lenders. Private lenders and/or Mortgage Investment Corporations are not regulated and have different and varying income verification requirements that we will not cover in this article.
These applicants have sufficient and acceptable, traditionally verified, personal income to qualify for a prime mortgage. If this is true of you, other than self-employed documents requirements, you should be able to qualify for a prime mortgage in the same way as any employee with similar credit and income, working for a company.
If you are a “Commission-only” applicant, you will need to qualify for a prime mortgage under this program.
If your personal income is not sufficient to qualify for your desirable prime mortgage, we may be able to gross-up your income or add-back some business expenses to your personal income which may help you to still qualify for a prime mortgage under this program.
While information is easily and abundantly available, information by itself does not achieve goals. Transformation and results occur when we understand the information, incorporate it into ouraThese applicants have insufficient, traditionally verified, personal income to qualify for a prime mortgage. If this applies to you, but your verifiable business income is substantially higher than your personal income, you may still be eligible for a prime mortgage if you qualify under a participating mortgage insurer’s “Alt A” or “Stated Income” program. Jacques reminds the audience that is not an accountant, but is advising from a mortgage point of view.
Here is an example of an applicant that may qualify for a prime mortgage under this program.
You show a two-year average income of $65,000 per year, on personal tax returns. Your corporation financial statements show average revenues of $350,000 per year, for the last two financial years and you have $200,000 retained earnings in the corporation. If you need your income to be $85,000 to qualify for a mortgage, a lender may accept the higher income since your corporation is profitable and seemingly sustainable.
To be eligible for a mortgage under this program your mortgage must either be insured or insurable with an eligible Canadian mortgage insurer. goals, and work those goals.
These applicants have insufficient traditionally verified personal income to qualify for their desired prime mortgage, but they have enough equity in your home and/or sufficient provable liquid assets to aid their mortgage application. If this is you, you may qualify for a prime mortgage under a lender’s net worth lending program. The interest rate is a little bit higher with this program.
It is important to note that mortgage regulators have essentially made pure equity lending as we knew it before, obsolete. In other words, it is no longer possible to qualify for a regulated mortgage purely based on the equity in your home, irrespective of your income. It is also important to know that each lender sets its own net worth guidelines and the amount of mortgage lenders that allow for net worth lending are fast diminishing. For these reasons, it is impossible to define net worth lending guidelines in one article, such as this.
These applicants have insufficient traditionally verified personal income to qualify for a prime mortgage and they are ineligible for a prime mortgage, but they have sufficient and acceptable business revenues. If this is you, you may be eligible for an alternative mortgage.
Alternative mortgage lenders charge higher interest rates to reflect their risk, but they also have more relaxed lending requirements that help you qualify for their mortgages.
An alternative mortgage can be very useful if an applicant needs a relatively short period, normally between 1 and 3 years, to increase their personal income so that they can qualify for a prime mortgage at the end of the alternative mortgage term. Jacques illustrated this point in the webinar – we encourage you to watch and understand his diagram explaining the journey.
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Self-Employed Mortgage Document Requirements:
At Mortgage Allies, we believe in a transparent process. It’s in our core to educate and solve mortgage problems for our clients. We will guide you throughout the journey so that you’re informed about the documents and process, and we keep make it our mission to keep you posted throughout.
As a self-employed person you should expect to provide your mortgage lender with a lot more income verification documents than a normal employee. This can be very painful (needles in eye kind of discomfort), but if you are organized, you should have most these documents readily available.
These are the minimum documents, by business/mortgage program type, that you will most likely need to provide your mortgage lender:
- Proof of business ownership: Articles of Incorporation and/or shareholder agreements
- Business Financial Statements: Accountant prepared, Notice to Reader statements for the most recent, past two financial years
- Personal T1 Generals for the most recent, past, two, tax years
- Personal Notices of Assessment for the most recent, past, two, tax years
- Proof of business ownership: Master Business License
- Personal T1 Generals, including the Statement of Business Activities for the most recent, past, two, tax years
- Personal Notices of Assessment for the most recent, past two, tax years
- Proof of business ownership: HST registration, employment letter, etc.
- Personal T1 Generals, including the Statement of Business Activities for the most recent, past, two, tax years
- Personal Notices of Assessment for the most recent, past, two, tax years
- Proof of income source: employment letter, etc.
- Personal T1 Generals, including the Statement of Business Activities for the most recent, past, two, tax years
- Personal Notices of Assessment for the most recent, past, two, tax years
This one is a little different! Income verification documents may vary significantly between alternate lenders, but the list below represents the minimum documents you should have ready to submit to an alternate mortgage lender:
- Proof of business ownership
- Depending on the lender, 3, 6 or 12 months’ business bank statements
- Business invoices. Your lender may request business invoices that represent the business’ revenues
- Self-declared income letter. You may be required to complete a letter declaring your business and personal income.
- Note that alternative mortgage lenders may still require similar income documents as prime mortgage lenders from you. Be prepared for all of the documents! DNA samples soon (just kidding).
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Income Taxes vs Mortgage Interest:
All of us try to avoid income taxes, but none more than the self-employed. However, this desire can unknowingly cost us more than the income taxes we try to save. Jacques says that the best way is to just do it right – pay your taxes. There will be no “stories” to cover up, or foggy memories because you’ve got your cards open. He went on to explain that as an immigrant, he has seen a different life. In his previous country, as beautiful as it is, he was taxed a lot, and didn’t see much for it. In Canada, we can have three or four feet of snow, and tomorrow – it’s all cleared up. We’re able to see things work and he feels good contributing to the effectiveness and efficiency of the country. A greater good for all!
Let’s use an example to see how this can happen:
Let’s say you need an annual income of $95,000 to qualify for a mortgage of $400,000, but to save on taxes you have made sure you capped your annual income at $65,000. As a result of your lower income, you have to accept an alternative mortgage for two years, at 5.0%, instead of the 2.69% on offer for a prime mortgage.
Are you still saving or is the additional interest you will be paying for the higher alternative mortgage more than the income taxes you saved?
We ended off the evening with a great Q&A session. Thank you to everyone who was brave enough to put up their hand and ask a question. The team at Mortgage Allies hope that our webinar participants and readers have been able to take-away some helpful points from this. Until next year – have a super festive season. We can’t wait to come back in 2020 with even more helpful content for you, our clients.