Mortgage market tightening up for self-employed
You'd think being a self-employed professional or running an established small business would make someone an appealing prospect for a mortgage.
Truth be told, many successful individuals don’t fit traditional mortgage lending criteria.
Without an established stream of pay stubs or a confirmation letter from an employer, lenders have few of the traditional assurances that you can handle your mortgage obligations.
What's more, a fair portion of the money coming in to the business may be deductible overhead costs which reduce your net income – the number underwriters typically rely on to determine creditworthiness.
As a small business owner, you’re usually expected to provide detailed financial statements for their company for at least the past two years. However, if the net profit of the business has declined thanks to the recession, lenders may give greater weight to the most recent year’s figures instead of a longer-term average.
The key here, say mortgage experts, is to calculate and highlight all the “add backs” to determine the true net income from your business. You can include items like depreciation or home-office expenses, for example.
In some instances, small business owners opt for “stated income” mortgages where lenders don’t verify the borrower's income so closely.
These are available even if you’ve been self-employed for only a short time, providing you have experience in the relevant industry. But they can be costly.
Since it's a riskier loan from the lender's perspective — someone might overestimate or even exaggerate their income to get approved — the interest rate is usually higher, as might be the insurance premiums.
Last month, CMHC started tightening the rules for self-employed borrowers who don’t provide detailed tax records, insisting that they put down at least 10 per cent when purchasing a home, rather than the previous five per cent.
If you work for yourself, have you had trouble obtaining a mortgage? What helped turn the tide in your favour?By Gordon Powers, MSN Money
Posted by: Go to a decent broker - not a big bank. | May 13, 2021 5:52:41 AM
I applied for a mortgage with ING and was refused; then I went to Scotiabank and was approved at a higher rate; then I went to a Mortgage Broker (Mayer Capital) and was approved at a lower rate through Merrix Financial (a European bank). The big banks aren't a good option for mortgages any longer. BTW, I was able to pay the$300 000 plus mortgage off in five years.
Posted by: Kris | May 13, 2021 8:18:40 AM
It's not only mortgages that are affected. If you have your own new business, all types of credit are affected.
While setting up my business account for a new business, the bank asked if I wanted a business credit card and I said yes. OK, they said, gave us two years of business financial statements. Oh that's right, you're a new business and you don't qualify. (But they really wanted to boost my personal credit card to $25K and that wouldn't have been a problem?)
At a local car dealership I wanted to co-sign a car loan for my daughter, total $16,000, I was told I didn't qualify as a co-signer as I no longer had a credit rating as a new business owner of less than two years. Even with $10,000 down they wouldn't give a loan. (Went elsewhere and paid cash and my daughter pays me back).
All this with significant steady income from another source, spouse working, healthy saving accounts and a $300K house nearly paid off.
The morale is if you're going into business for yourself, be sure you can support yourself for two years and hope your level of business income satisfies some mysterious ceiling set by an unknown enitity.
Posted by: jay birkly | May 13, 2021 8:41:18 AM
due to divorce, I have paid all expenses myself for 3 years...now to get spouses name off mortgage have to refinance but even though EXCELLENT credit rating and not behind on anything...debt to income ratio high...don't qualify...may lose home which is in my name alone...dealt with same bank for 35 years...same job for 16 years and same home for 35years(already paid off once)
IF I had bad credit OR on assistance would have mortgage approved next day....another kick for us average working poor
Posted by: rasta | May 13, 2021 7:26:10 PM
Rasta got himself a plant biz, and aving a ard time geting a loan..can anyone elp?
Posted by: Lorilee Lefebvre | May 13, 2021 8:08:36 PM
There are far more ramifications with CMHC changing its policy regarding Self Employed people This policy came into effect in 2007. The rule was good credit .. over 2 years in business and reasonable income for the type of work you were doing. They financed up to 95% of the value or purchase price without traditional proof of income . I am a mortgage broker and have written my MLA regarding this issue. There are many things that arent evident about this program that the government is simply being mum about that will surface in the days to come when self employed people try to refinance and are declined as they have been in business for over 2 years and no longer qualify. Between 2007 and now CMHC has been insuring Self employed mortgages under their "Simplified" or stated income program and have charged people enormous premiums to do so. Now when these same people go back for a mortgage and do not have the proper 2 year tax information they will be forced to repay another insurer an additional insurance premium.( If the program had not been severely modified they could have received credit from CMHC for premiums already paid.) Some of these were as high as $40,000.00 These were insurance premiums expected to cover the default insurance for 25+ years. The sad thing is the only other Company offering this program is Genworth a US based Company.
Sad but true..it seems it is our tax dollars at work !
Posted by: don | May 14, 2021 3:50:18 PM
Tax rules are different for employed workers and business owners so it does make sense that the rules to borrow money differ also.
Posted by: Lorilee Lefebvre | May 14, 2021 6:53:37 PM
Don yes it would make sense except that the Federal Government giveth then taketh away.. So now all these people that have paid premiums are faced with a dilemma Firstly the government has NOT given self employed people the time it will take to adjust their taxes .. if they so choose to do so ... as it will take 2 years. So now they have reaped huge insurance premiums and decide now that our self employed market should be attacked, when earlier in the year they were talking about attacking consumer credit which is certainly not mortgage money. Yet you see nothing about credit cards or high interest "consumer loans".
Dont you think that someone who has strongly demonstrated that they can pay their debt and handle their financial obligations after being self employed for several years deserve the respect they have earned. The Government sanctions any of the deductions that are filed and now is punishing people for those very sanctions???
I was told by an employee of CMHC this exact statement " They are ripping the government off" Meaning self employed people. Self Employed people make up at least 40% of our commerce depending which study you look at. So now .. 40% of Canadians cannot get mortgages basically because they dont pay sufficient income tax. This is a tax grab thru and thru
Simply my humble opinion .
Posted by: Scott | May 15, 2021 10:41:01 PM
I started a buisness in 1993 and had avery difficult time with credit for thirteen years. When are the banks going to wake up and realize that self employment and small buisness are an ever growing segment in society!
Also it's not like big buisness has shown a lot of fiscal responsibilityy, just look at companies such as Nortel and the big three auto makers. I am now just an "employee" making two thirds the income that Idid when I had my buisness yet I am now inundated with offers of credit and my bank is constantly after me to borrow more money. What a screwed up system.
Posted by: Andrea Coutu | May 16, 2021 4:33:16 PM
I've never had trouble getting approved. I just show my old tax returns. It proves an average for my earnings over the past several years.
Posted by: don | May 17, 2021 10:21:58 AM
It is all based on income....show no income...get no money. Cant have your cake and eat it too. If your taxes arent showing any income then no money..if you are showing income.....no problem......simple. This problem could be soved by a flat tax for business...based on gross income.
If a wage earner showed their income after expenses they would not qualify either.
Posted by: gotoworker | May 17, 2021 2:16:41 PM
Posted by: Scott | May 18, 2021 1:11:35 PM
In response to Don 5/17/10 To show more income means forgoing legitimate tax write offs and thereby paying more taxes needlessly. That's one of the problems is the banks refuse to recognize these things.
Posted by: don | May 18, 2021 2:05:43 PM
Scott: But if the money is spent then how can you afford the payment? You should still have enough left over after expenses to ensure the person loaning you they money that you can make the payment or you are a bad risk. Dont see what it has to do with the write off. Are you buying things just for the write off or do you require them? If you are purchasing for the write off then a decision needs to be made about which you require more....the item ,a write off and lower tax bill or the ability to borrow for the other item? Paying a little tax isnt so bad....it shows you are making money.
Posted by: Scott | May 18, 2021 2:37:13 PM
Don, I am talking about legitimate expenses such as vehicle,utilities, insurance etc... which just about anyone has as an expense but when you write them off it lowers your income in the eyes of the bank. In short if a buisness person takes advantage of all "legitimate" tax write offs available to them you are penilized by the financial industry.As stated in my earlier post I have about two thirds the income now but I have acces to four times the availible credit,yet my basic expenses remain the same, vehicle,utilities, insurance etc... and in fact many of those expense are even higher now.
Posted by: don | May 18, 2021 3:19:28 PM
Scott: Only business has this as an expense. I am a wage earner and pay taxes prior to paying these expenses so not everyone is writing this off. There needs to be balance and and I am not sure how you want to see this. Show no income...pay no taxes yet be credited in the eyes of the person loaning the money as being solvant because you spent money last year. Why, if expenses ate up everything is the loaner to think those expenses will drop and you can afford the payment? I my world I pay the taxes up front and then it is up to me to manage my money to control expenses so I can qualify for a loan should I want to make a major purchase. I know I sound tough on this one but I know many business people who take trips (had a boss complain just once they wanted a vacation without stopping in Tornoto so they could claim the expense as business) who use personal expenses as write offs to avoid taxes . The lines are blurred as a lot of business write off what are in reality personal expenses against their business to avoid tax. Then say I have the money. Another thing I have seen over and over is people who tell me they bought something they did not need because one year they showed income and would have to pay taxes. Two years later they were crying the blues because they really did not need it, bought it to avoid tax, and things were not so great for a few years and they are having trouble making the payments, or cant afford something they really need. My opionion is too many people treat taxes as something someone else should pay. Sometimes it seems like some businesses makes decision with the biggest goal in mind to avoid taxes, not with the long term health of their business. I guess the question is who does the income belong to....the person or the business or do once again the lines blur depending on who needs what in which given moment. How is the person loaning the money supposed to figure this out? Maybe there are to many legitimate expenses allowed? Do you have the money or not? No income = no taxes = no borrowing power. I dont see how the fiancial insturions can work with No income = no taxes = borrowing power. It would break the country. Still dont see how you can have it both ways. Do you want it based on something other than taxes?
Posted by: Scott | May 18, 2021 7:33:32 PM
Don, I can't speak for other buisness people that you may know but in thirteen years the only holidays I took were maybe an extended long weekend because as the owner I was responsible for sales,invoicing,collection,purchasing etc... Never once did I try to write off any expenses that I incurred during these vacations because they were personal expenses. Anything that I purchased for the buisness was necessary, not just because I wanted it or to try to avoid taxes and even after any write offs that I had I paid plenty of taxes. Not only that but there are many other expenses that an employer or buisness owner faces that are not write offs such as employee tax WCB premiums and so on, so maybe you should jump to the other side of the fence and start yourself a buisness so that youu might have a better idea of what you are talking about.
Posted by: don | May 19, 2021 3:09:40 PM
Scott; Again..Then you have dont have the income to show you can make the payment...the answer will always be no. What should the decision to lend money be beased on then...faith...they wont do that for anyone. If there was plenty of income and taxes were paid there should have been no problem accessing funds. They dont make money unless they lend it so there has to be something that is stopping the lender.. Something doesnt add up. A previous poster said she produced income tax records and never had a problem? Maybe a different lender?
Posted by: Lorilee Lefebvre | May 21, 2021 2:20:14 PM
Prior to 2005 business owners had to show their tax returns and make sufficient after business expenses to carry the mortgage which is determined by a percentage of your income. Now they calculate this on before tax dollars ie: gross income. If a businessperson has a good accountant they can minimize the taxes. So all the expenses are legitimate.
If your bottom line ( line 150 ) on your tax return can support the mortgage using 32% of your before tax dollars for housing expenses such as mortgage payments, taxes and heating costs, and 42% including all other outside debt,then any lender can take an average of 2 years of taxes to prove consistency.
However in 2005 Genworth ( a US based default insurer) introduced a mortgage product they called Alt A. What it meant was that self employed people who could not prove their income still could qualify is they could prove they had been in business for 2 years had excellent credit and all personal taxes were paid up to date. This program still exists.
Canada Mortgage and Housing Corp followed suit in 2007 introducing their simplified program. Same rule only they would insure mortgages to 95% on purchases and 90% on refinances.
Make no mistake the insurance premiums on these products were very hefty. Self Employed individuals paid the insurance on a sliding scale just like everyone else but the scales were much higher if you couldnt prove your income. 4.75% of the mortgage amount if you were borrowing to 90%. 6% if you were borrowing 95%. Do the math on your own mortgage .
Now.. These insurance premiums were to be for the life of the mortgage.
Now take a person that paid $40,000.00 to CMHC ( Canada Mortgage and Housing) in 2008 under their self employed program.
Suddenly and without warning CMHC has pulled their self employed program. Well not exactly pulled it but...... Now if you have been in business for over 2 years you are once again required to prove income with your tax returns.
So it favors new business not tried and true.. this is not at all fair.
So lets say this person needed to refinance his or her home to put a new roof on and perhaps take care of some upgrades. They havent had time to ( if they so desire to) file their taxes in such a manner that it can now support the mortgage. They lose as now that same insurer will not reinsure it.
The client is then faced with 2 options. They can pay the other insurer to refinance the first mortgage at a decent rate which will mean paying the $40,000.00 all over again as you wont see any rebates coming from CMHC if you pay that mortgage off.
Or obtain a higher rate second mortgage.
Simply put if the expenses that people are claiming arent legitimate then why is the government allowing them? I believe they must leave the guidelines in place for BIG BUSINESS therefore it is a way to punish the small businesses, for which all the deductions are legal!
Sorry this is so long but its a very important issue that will come up suddenly on people who are not expecting it.
The government has made no public announcement regarding these new guidleines.
Posted by: May Robertson | May 21, 2021 8:44:46 PM
Hi Jay Birkly | May 13, 2021 8:41:18 AM,
If you have steady employment and excellent credit, it would seem like you should be able to get some sort of Re-Financing on your home. Of course there are several other factors such as debt service ratios to consider. Why not send more details to my work email address at email@example.com or contact me through my webpage at www.mayrobertson.ca, and let me have a no-obligation look at your situation. - May
Posted by: wayne | Nov 3, 2021 8:58:55 PM
I agree with him on loans i have a great credit rating one of the best likey in the country but cant borrow any money because i take my right offs and leaves me with out enough income