Q: Hi Kyle, I am self employed and have been told that I don’t qualify because I write off most of my income. This doesn’t seem fair to me that I make more money now that I am self employed but qualify for less. Is there another way that I can qualify for a mortgage? Kenny.
A: Hi Kenny, yes being self employed can pose some difficulties when it comes to getting a mortgage but there are a few ways that you can get around it. Many lenders have different programs, so sometimes if your bank has turned you down a broker may have access to another program with another lender, or be able to use a larger amount of income.
There are 3 different ways a bank will look at your income:
1. A 2 (or in some cases, 3) year average of your income. If your most recent year was lower, they will usually use the lower income. Many lenders will “gross up” your income on line 150 of your tax return. Typically the lender will require at least your Notice of Assessments but most are also looking for your T1 Generals for the past 2 years as well.
2. A 2 year average income, with “add-backs”. The lenders that use add-backs will typically take your line 150 (net income) on your tax return and add back expenses that they deem you would have had whether you are business for self or not, or expenses that aren’t cashflow expenses (writing off depreciation or amortization). Most lenders will add back 3 items: Business use of Home, Motor Vehicle Expenses, and CCA (Capital Cost Allowance, which is essentially depreciation). Sometimes lenders can also add back meals and entertainment.
3. State your income. These types of mortgages are often referred to as “Alt-A”, which is the reverse of qualifying based on your income. Instead of providing an income amount and the bank telling you if you qualify or not, you tell the bank how much you want and they “state” your income at a higher enough amount to qualify for the loan. Although this sounds extremely convenient, it isn’t a guarantee. The bank (and the mortgage insurer if borrowing more than 80% of the value of the home) will do a reasonability test to determine if the stated income amount is reasonable for your line of work given your employees, etc. If you are a cab driver and need to state your income at $200,000 to qualify, there is a good chance you will be rejected.
Typically I will obtain 2 years of T1’s and Notice of Assessments to see if options 1 and 2 work, as they are more black and white (easier to tell my client with a high degree of certainty their qualifications), it makes the underwriting process easier and in some cases rates and CMHC premiums are lower.
There are a few things to keep in mind when qualfying for a stated income product:
– Credit requirements are steeper, often lenders want to see a 680 or 700 beacon score minimum (compared to a 600 – 650 minimum).
– Down payment requirements are steeper. Minimum CMHC will insure is now 10% down, versus 5% for an income qualified individual. Uninsured, most stated income products require at least 25% down (instead of 20%).
– Most lenders do not have a program that allows a stated income individual to qualify for a rental property purchase, and if they do, the rates are often much higher. Instead, typically the client must qualify using their income.
– Typically gifted down payment is not allowed, the funds must be coming from your own sources.
– If you owe any taxes to the CRA, you will run into issues obtaining financing. If you owe the bank and the CRA money, guess who get’s their share first…you guessed it, the CRA. Banks don’t like that very much.
There are a number of different programs out there for self employed borrowers, it is a good idea to know what options are available in case you have been turned down by your bank.
– 10% down (or more) stated income through CMHC if you have been self employed between 1 and 3 years, or through Genworth (another mortgage insurer) if you have been business for self for 2 or more years. CMHC’s view is that once you have been business for self for 3 years, you should be taking home your income. Of course, this is rarely the case given the financial benefit of being able to write off significant amounts of income to reduce taxes.
– 25% down uninsured through a few lenders. Typically sufficient proof of business for self (business license, GST registration, articles of incorporation, etc) is required, as well as very strong credit and net worth.
– 30% – 35% down uninsured through some lenders. Once you get to the 35% down point it is very easy to get the loan. In some cases, only a Notice of Assessment to prove you don’t owe taxes, a reasonable credit rating and a strong appraisal is all that is required.
After this, the more down payment the easier it is to get qualified and the more programs that are available (many LOC products aren’t available on stated income programs unless you have 35% down).
Of course, because of the “stated” aspect where the lenders run a reasonability test, there is a lot of grey area so it is best to speak to your broker about qualifying in more detail to have a better understanding of how to qualify.
Questions can be directed to me at 778-373-5441 or firstname.lastname@example.org.