The following post is by Jake Abramowicz, a mortgage agent with Mortgage Edge in Toronto.
People are turning to self-employment in increasing numbers, perhaps not by choice but by force. In fact, as we try to exit the last 5 years of economic doldrums, the number of self-employed individuals in Canada topped almost 16% in 2012.
But when it comes to mortgage financing, being self-employed isn’t easy – it puts you in a catch-22 territory. The first issue with qualifying for a self-employed mortgage is income verification. In Canada, there are essentially two ways your income can be verified in order to qualify you for a mortgage:
- Full income
- Self-employed or “stated” income
If you have a full-time job, you fulfill bullet point #1 and this article won’t apply to you. However, if you’re self-employed and show a high net income, this article also won’t apply to you, because you’re already earning a healthy gross income, or your deductions are limited to your field, and therefore you’re not able to bring your income tax portion down. As a result, you would qualify the same way your full-time employed friends are – a 2-year average of Notice of Assessment income is used to determine your qualifying potential.
Example: My client is a self-employed business owner of a travel and hospitality services company. In 2011, his net line 150 income was $98,000, and in 2012 it was $122,000. As a result, his 2-year average is:
$98,000 + $122,000 / 2 = $110,000
$110,000 is the number I can use as his 2-year average of income. Furthermore, some lenders will allow me to add 15% to this number if I need to, to help the qualifying ratios be more acceptable for the lender and insurer (if necessary).
Self-Employed / Stated Income
Now let’s get on to the meat and potatoes of most self-employed applicants – those who do not show a net income high enough to qualify. These applicants have four choices and they all depend on the size of your down payment:
- If you have a 10-14.99% down payment
- If you have a 15-19.99% down payment.
- If you have a 20-34.99% down payment.
- If you have a 35% down payment, or more.
10-14.99% Down Payment
Let’s start with those of you who only have a 10-14.99% down payment. You fall under the category of “stated income ALT-A” applications with CMHC, Genworth and Canada Guaranty. If you have been self-employed for more than 2 years but less than 3 years, you can apply via CMHC. If you have been self-employed for more than 3 years, you have to apply via Sagen or Canada Guaranty.
Your loan is looked at based on reasonability of income at the time of submission, as well as strong credit. Also, at least half of your down payment must be your own assets for more than 90 days and cannot be “gifted”. You’ll pay a hefty 4.65% mortgage default insurance premium when going this route, but in most cases you can still get the best mortgage rate.
A note on reasonability of income: I have found through experience that when declaring more than $100,000 as the income required to qualify for a deal, lenders have a lot more questions and the deal goes under increased scrutiny. Most of the time, the best gauge of reasonability is through “gross income of the business”.
One strict requirement that many fail to remember is the need to have most recent taxes paid up-to-date and have your Notice of Assessment as proof. Also, the maximum loan amount under the “ALT-A” program is $750,000 in the GTA, Greater Vancouver and Calgary, and $600,000 elsewhere in Canada. And, unfortunately, most lenders won’t pre-approve “ALT-A” applications, meaning you won’t know how much you qualify for until it’s time to get your financing condition removed from your offer.
15-19.99% Down Payment
If you have a 15-19.99% down payment, but you do not qualify for the above based on your income being too unreasonable OR having weaker credit OR your source of down payment OR other reasons decided on a per-file basis, you must then choose to apply with the “B” lenders or Equitable Trust. These lenders price their deals not only based on income and credit, but also on property. With prime properties to lend against, lender’s income proof requirements are a little less strict. However, these lenders also charge lender fees (sometimes up to 1% of the purchase price) and higher mortgage rates (about 0.75% higher than the best fixed mortgage rates on the market).
20-34.99% Down Payment
If you have a 20-34.99% down payment and can’t get approved by one of the two options above, you have a “wildcard” option: credit unions. For example, Meridian Credit Union in Ontario has a fantastic program for everyone who is self-employed, including 100% commissioned staff (I’m looking at you: realtors, car salespeople and mortgage brokers/agents). To qualify, your credit score must be good (680 or more), and you must have 2 years of T1s or corporate financials showing your gross income. A 0.25% rate premium is applied – a small price to pay. There is also a local geographic restriction: your home or place of employment must be within 15 to 30 km’s of a branch. This program is only available in Ontario, but credit unions across the country may offer something similar.
35%+ Down Payment
“Equity-basis” buyers with a 35% or more down payment can go to the big banks, such as B2B, TD and Scotiabank, to get their mortgages. Applications are approved based on a very strong equity position (35% down) and good credit, and income reasonability only comes into play when it becomes truly unreasonable. Not all big banks have equity deal offerings, though. National Bank closed their doors to offering mortgages based on equity, and TD Bank has very strict criteria, including documentation review for their clients (which becomes even more strict if you’re a non-TD client). Mortgages that are approved based on equity do not carry mortgage insurance fees or lender fees, and they do not have higher mortgage rates but rather are priced alongside with full income-qualified deals.
As you can see, there are plenty of options for the self-employed workforce, when it comes to home financing. It can be a little bit more expensive, or a little bit more difficult, but remember – when you’re self-employed, lenders can’t see your “guaranteed” income the way they can for a full-time employee. Therefore, lending institutions must do a good job of mitigating risk with these files, to prevent issuing loans that will not be repaid or have a slower repayment history. My best piece of advice is to work with an experienced mortgage broker or agent who not only has access to all of these offerings but who can help you plan your borrowing strategy effectively.