One of the drawbacks of being self-employed is looking for financing when you write your income down so you pay minimum taxes.
Since CMHC eliminated their stated income program for BFS clients last year, self employed clients are seeking the help of brokers more than ever. Here’s an inside look at how Banks and Broker lenders qualify individuals for self employed products.
Traditional Financial Institutions (your “Big 5”)
Line 150 on Tax return + 15%: This is the formula most traditional institutions use to qualify self employed applicants for their mortgage. Normally, business owners have a large amount of writeoffs so this amount could be substantially lower than what they are actually making at their business. If the client does want to look at a stated income product they would require a much higher downpayment and proof of cash flow within the business. There must be no income tax arrears and a low debt load.
The Mortgage Centre Lenders:
Along with being able to access the traditional financial institutions we all know well, there are alternative lenders that will consider other products to suit the self-employed borrower who has maintained excellent credit and low debt load.
Line 150+ Addbacks: adding not only the net income but also expenses such as Business Use of Home, Capital Cost Allowance, and Motor Vehicle Expenses to income.
Stated Income: Clients with a minimum of 10% down can “state” their reasonable business income to qualify for their mortgage and still get insured by Genworth Canada. On a case by case basis lenders will consider self employed for less than 2 years if they have been previously working in the same industry.
Commissioned Employees: In some cases (such as realtors) lenders will take the gross amount of commission on their t4a for the last 2 years.
The best advice I can give self employed clients before applying for a mortgage is to have your paperwork in order! Different lenders require different things and WILL ask for extra paperwork (ie bank statements, business licenses, articles of incorporation) if you are needing a non-traditional product to qualify.
Call the office today at 519-539-6153 if you’d like to discuss your options!