If you’re self-employed and about to apply for a mortgage, be prepared for some serious form-filling. Getting financing isn’t as easy as it used to be, say mortgage brokers — and for the 15% of Canadians who earn money for themselves without a steady employer’s salary, it’s harder still.
“Back in the day, five years ago you could hold up three fingers and say ‘I promise I earn $100,000, and many lenders would take your word for it,” says Claire Drage, a senior mortgage agent with Mortgage Alliance in Greater Toronto. But things have changed, she warns. “It will take more paperwork, more documentation, more justification from the borrower on why they should be approved.”
Since 2008, the government has lowered the maximum amortization period from 40 to 25 years, and reduced the maximum gross and total debt service ratios to 39% and 44% respectively. Then, last October, the Office of the Superintendent of Financial Institutions’ B-20 rules put the underwriting practices of federally regulated financial institutions under scrutiny.
“Generally these changes have made for more rigorous review of documentation which does impact the self-employed borrower programs to a greater extent than salaried borrowers,” says Gary Siegle, Alberta-based VP of the Prairies for mortgage services firm Invis.
The self-employed often hinder themselves with creative accounting to lower their income. “They may have a different way of reporting all their income, reducing all their taxes as much as possible. Those are the ones that are more challenging,” says Daryl Harris, a broker at Verico One Link Mortgage & Financial in Winnipeg, and chair of the Canadian Association of Accredited Mortgage Professionals. Those not reporting cash jobs also reduce their provable income, making it harder to get a mortgage.
“Even though you’re self-employed and you benefit from amazing tax breaks, and your personal income tax return is incredibly low, you still have to prove to the lender that you can afford to pay this mortgage back,” adds Ms. Drage.
For those that find it hard to prove their income, stated income programs are an option. Designed for those with less than three years’ business operation, it requires at least a 10% downpayment, and not all lenders support it. TD Canada Trust, for example, looks instead at documented income such as T1 financials, business financials, and notices of assessments.
Changing attitudes among lenders makes it more difficult for the self-employed to deal with top-tier banks, says Don Barr, president of Verico Select Mortgage in Victoria. “It is forcing a lot of stuff out of the ‘A’ business and into the alternative business,” he says. Alternative lenders, some of which are not federally regulated, may take a less rigid approach when assessing self-employed applicants. However, the trade-off is often a higher interest rate.
There are several things to remember when applying for financing:
• Loan-to-value matters. Offering a 10% downpayment will make the process far more difficult. They care more than ever about up-front equity.
• Keep up with your payments. Make sure that you are up to date with the CRA before applying to a lender.
• Be organized. Ensure that all your accounting and tax documentation is up to date, and that you are reporting
• Pay off your credit. Get those outstanding cards and lines of credit paid down before you let your lender score you.
• Be prepared to adjust your expectations. You may have to adjust your target price after talking to a lender.
• See if your lender will ‘gross up’ your income. Some lenders may add a percentage when assessing your taxable and/or non-taxable income to allow for business expenses you incur.
And above all, start early in the process, preferably with a pre-approval before you look for a home, because one thing’s for sure: you’ll be doing more hoop-jumping than you think.
-Dannny Bradbury, Financial Post