So you’ve finally taken that leap and started your own consulting business, cleaning company, Etsy shop, or other career as a self employed person. Or maybe you’ve been doing contract work for a while now? You may have jumped both feet in or you may just be starting off part-time. In any case, if buying a home (or an investment property) is in your upcoming plans, there are a few things you need to know.
If you want to use your self employed income towards qualifying a mortgage, a pre-approval is extra, extra important as there are more moving parts that’ll lead to an approval or decline. The main things to know are:
ALL ABOUT THE TIMING
For access to the most Lenders and best rates, you’re going to need to have been self employed for 2+ years before your income can be used. If you have access to 20% down or more, we might be able to qualify you with an Alternative Lender but that option comes with fees and Alternative Lender interest rates (ie. often about 2% or more higher rates than typical “A” Lender offerings).
PAYING MORE IN TAXES COULD MEAN PAYING MORE IN INTEREST
Most Lenders will calculate your income based on the average of your Line 150’s on your last two years of tax returns. If your awesome Accountant wrote off a lot of expenses and drastically decreased your taxable income, you’ll have paid a lot less in income tax but you may end up paying more for your mortgage because now you might not quite qualify for the size of mortgage you want using typical mortgage guidelines.
A). With a minimum of 5% down, we may be able to “add-back” some of the Accountant’s write offs (ie. for depreciation, home office, and capital costs) but that may still not give you enough income to pass today’s stress tests and debt service a mortgage.
B). With a minimum of 10% down, we might be able to do a “Stated Income” product where we show the Lender more paperwork and give an argument why you have more cash flow than what shows on paper. Keep in mind that a Stated Income mortgage comes with higher Mortgage Default Insurance premiums (ie. Genworth/CG fees), some Lenders may offer you slightly higher interest rates, and you will need to provide a lot of extra paperwork. ALSO, if you want to avoid the increased Mortgage Default Insurance premium, you will need to put down 35% or more!
C). Worst case, if you don’t qualify for the Stated Income product, with a minimum of 20% down, you may be able to go through an Alternative Lender who will take a peek at 3 to 6 months of your Business Bank Statements and rely on those numbers instead of your tax documents to decide what numbers to use for your income. No Mortgage Default Insurance premiums here but Alternative Lenders have higher interest rates and charge Lender fees.
Last main thing to know is that you’re going to need a lot more documents than you would have before you became self-employed. Some of the extra documents to expect are:
- Proof you’ve been Business-for-Self for 2 + years
- Most recent Notice of Assessment to confirm you have no taxes owing to the CRA (if you are on a payment plan, you may need to pay all outstanding taxes out early)
- 2 years of Accountant prepared Financial Statements or T1 Generals (confirming GROSS and NET business incomes)
- 90 days bank account history of your primary chequing account (even if down payment has been saved in a different account to show how you’ve been paying yourself)
- Invoices or contracts may be requested to line up with any large deposits in your business bank account if down payment has been saved in your business account(s)
WHAT ABOUT THE CMHC CHANGES “MAKING IT EASIER FOR SELF EMPLOYED PEOPLE”?
You may have read/heard in the news that CMHC has made changes to make it easier for Self-employed people to qualify for mortgages. This is true but the changes are quite vague and Lenders have not yet confirmed if they will change their policies to match those of CMHC.
Basically, the changes allow some people to qualify for a mortgage with LESS than the mandatory 2 years in operation if they:
- Are acquiring an established business
- Have sufficient cash reserves
- Have predictable earnings
- Have previous training and education in business field
- Have demonstrated history of managing credit
Documentation to confirm the above will include all the usual self-employed documents plus additional ones confirming previous employment income.
Aside from the above, CMHC is allowing for “add-backs” to be added to income using the following (instead of only via 2 years of Accountant prepared Business Financials):
- Statement of Business or Professional Activities Report and Notice of Assessment and T1 General; OR
- Proof of Income (POI) Statement, which can be used in lieu of Notice of Assessment and T1 General to confirm income taxes are up to date.
Important thing to keep in mind is that although CMHC is now allowing these changes, the new rules are very vague and most Lenders have not adopted them yet… Perhaps the rules will become more defined in the new year and more Lenders will come on board then?
If you have questions about renewing or refinancing an existing mortgage OR qualifying for a new mortgage, please do not hesitate in contacting me at 780-863-0700.
Remember, call Minn for MINN-imum Stress, Maximum Service.