How To Qualify For A Mortgage When You Are Self-Employed

General Lynda Thai-Baird 25 Jul

There are great advantages to being in business for yourself. This categorization includes business owners, freelancers, independent contractors, and on-demand workers. People who are self-employed however need to know that there is some advanced planning required to be able to qualify for conventional financing.

According to Statistics Canada, in 2017 there were approximately 2.8 million people self-employed in Canada. A study completed by Intuit Canada last year, projects that Canadians working in non-traditional jobs will increase to 45% by 2020. In other words, being self-employed is a viable way of making income. It however just doesn’t fit very well in the conventional lending “box”.

In order to fit in the conventional lending “box”, there is a measure that lenders require that each mortgagee(s) (the person(s) applying for the mortgage) must meet. Some of the documents that self-employed individuals have to provide for the lender are their two most recent years of tax returns that don’t always accurately reflect the actual take-home income that a self-employed person earned. Tax deductions related to operating their business results in reporting an income on their tax return that can be significantly lower than what they actually take home. However, the “box” requires that their tax returns show the required income to justify the mortgage.

So, how does one show enough income when they are self-employed? The following points are suggestions of strategies on how to plan ahead and be prepared when you are ready to move forward in arranging a mortgage to purchase a property.

  • The easiest way to plan is to write off fewer expenses in the two years leading up to the property purchase. Yes, this means you will pay more personal taxes. However, your income will be higher which will easily qualify you for the mortgage amount that you are looking for.
  • Set your finances up through a certified accountant. Many lenders want to see self-employed income submitted through a professional rather than being done by yourself. The truth is that the time that you spend doing your own taxes will not be as efficient both financially and time wise as a professional. A certified accountant knows what to look for and has enough experience to understand the tax implications. Make sure you discuss with them what your goals are so that they can set up your taxes appropriately.
  • Choose your timing carefully. If you are leaving on an extended holiday or sabbatical within the two years previous to purchasing, your two-year average income is not going to be great. Take all the time off that you want AFTER your purchase. Plan your timeline with income in mind.
  • Ask your Mortgage Broker about stated income. There are options with some lenders to “state your income”. The lender will take a close look at the industry you operate in, the length of time you’ve been in business (a minimum of 2 years), and the size of your business. Stated income is a complicated approach to showing income however, your Dominion Lending Centres Mortgage Professional will know what questions to ask and how to negotiate this kind of proof of income. Documents such as bank statements, showing consistent deposits, will be requested by the lender.
  • Be prepared for higher interest rates. Lenders offer discounted rates to those that fit in the “box”. Those that are not conventional are seen as a risk and, therefore, are applied to a higher interest rate. There also could be lender fees attached to the mortgage.
  • Offer a larger down payment. Lenders are somewhat handcuffed to the insurer when there is less than 20% down payment on a property purchase. But if you offer more than 20% down payment, depending on the lender, their flexibility increases, and it is up to the lender or even a particular banking branch if they want to take you on as a client.
  • As a last resort, you can consider private financing. Even though it is an expensive option, it could result in the mortgage you are looking for. Rates are higher and there will be lender/brokerage fees. However, you could be in a private mortgage for only 12 months or even less, whereby giving yourself time to improve your credit (if need be) or topping off a two-year self-employed period to set yourself up to show stated income to the lender. The whole point of private financing is to use it as a short-term solution for a long-term plan.

Being self-employed does not mean that you have to show enough income on your T1 General in order to qualify for a mortgage. There are other possibilities to prove income when you are self-employed. And every lender has different guidelines as to how they view self-employment. If you are self-employed, plan accordingly and make sure you are well set up to show that the lender that you are a desirable candidate for a mortgage.

The Documents Needed For Your Mortgage Approval

General Lynda Thai-Baird 13 Jul

Buying a home requires a lot of paperwork (A LOT!). There are offers to make, agreements to review, and contracts to sign. Once the seller accepts your offer to purchase, one would think the paperwork would diminish, but unfortunately this is not the case.

Now you will need to apply for a mortgage, which requires its own small mountain of documentation, which could make or break your mortgage application, so it’s a good idea to start tracking them down well in advance.

Depending on your application, you will need to provide a a least a dozen types of documents during the mortgage approval process. Some of them are obvious, like your credit report and a list of your current assets, while others might come as a surprise. Here are the key aspects of the mortgage approval process that require documentation.

Down Payment Documentation

When you purchase a home, you will need to have a minimum down payment of at least 5% of the purchase price. This money can come from a variety of sources, including your savings, a gift from family, or by using the Home Buyer’s Plan, which allows you to withdraw up to $25,000 from your Registered Savings Plan (RRSP) to use as a down payment.

While your down payment can come from a variety of sources, you do need to prove the origin of your money. If you are using the money from your savings account, you will need to provide your mortgage broker with 90 days (three months worth) of statements from your account.

You will also have to provide an explanation for any irregular deposits during that time including proceeds from the sale of a vehicle or wedding gifts.

If your family is providing you with a monetary gift to go towards your down payment, they will need to explain that gift by providing your broker with a gift letter. A gift letter will need to include the following information: the name of the gift giver, the name of the recipient, the total amount of the gift being received, along with confirmation that the gift is genuine and has no expectation of repayment.

If you are using the Home Buyers Plan to help fund your down payment, you will need to provide a copy of the T1036 form that you submitted to your bank to make the withdrawal from your RRSP.

Transactional Documentation

Transactional documentation for a mortgage refers to information about the actual home you are purchasing. This should include the following: a copy of the original MLS listing, along with the accepted offer to purchase. Your real estate agent should provide this information to your mortgage broker on your behalf. In some situations, a lender may require a professional appraiser to verify the fair market price of the home.

Income Documentation

Finally, your lender will need to verify your income. If you have a full-time job, you’ll need to provide your T4 from the previous tax year, two recent pay stubs and a letter from your employer confirming your employment and salary. Depending on how responsive your employer is, this letter could take some time, so it’s best to secure it as early in the home buying process as possible.

If you are self-employed or have a different employment arrangement, you’ll need to provide a different set of documents. These documents are meant to prove income that is considered non-traditional. You’ll need two years of Notice of Assessments (issued by the Canada Revenue Agency) and possibly two T1 Generals, which is the PDF file that is created and submitted to the CRA when you file your taxes online or with an accountant.

Property Documentation

While this is not a necessity for every home, some rural homes will require extra documentation because they aren’t on municipal water and sewer lines. For example, a rural home may use its own water well and septic system. Your lender may require the system to be inspected by a third-party company, and the well water may need to be tested to ensure it is suitable for consumption.

While this additional documentation may seem onerous at the time, keep in mind that these additional inspections are designed to protect your investment as well as your lender’s. The last thing you want is for your home’s well water to be unsuitable for consumption, or for the septic system to requiring replacing.

Whether you are just getting started with the home-buying process or you are already well underway, it’s never to late to start getting your documentation in order.

Please contact me directly if you have any questions or would like a customized list of documents you’ll need for a mortgage so there will be no surprises when it comes time for you to move forward with your home purchase.

Source: www.clearhome.ca

Turn That Fixer-Upper Into Your Dream Home!

General Lynda Thai-Baird 4 Jul

Introducing the Purchase Plus Improvements Mortgage, a program which allows qualified purchasers to borrow up to 20% of the post-renovation value of a home (up to a maximum of $40,000) with as little as 5% down.

Here are the 5 steps to see if you can qualify:

1.Obtain a mortgage pre-approval from your mortgage broker, to determine your maximum approval amount.

2. Find a house you would like to purchase and have a general idea of what renovations need to be done as well as the estimated cost of the renovations. The purchase price plus the renovation cost cannot exceed your maximum approval amount. Note: The lender will request written quotes to be provided, detailing the work to be done, as well as the cost.

3. Once your offer is accepted, provide the accepted offer, as well as the quotes for the work to be done, to your broker. He/She will have the lender approve the mortgage with the cost of the renovations included in the mortgage.

Here’s an example:

  • Purchase Price: $350,000
  • Cost of Renovations: $35,000
  • Revised Purchase Price: $385,000
  • 5% Down Payment Required: $19,250
  • Mortgage Amount: $365,750
  • CHMC Fees: $13,167
  • Total Mortgage Amount with CHMC Fees: $378,917

 

4. Once you take possession of your home, you can begin renovations. The lender will instruct the solicitor to hold the addition renovation funds until the lender confirms the work has been completed. Once the renovations are completed, notify your broker and he/she will send out an appraiser to complete an inspection to verify the work is completed as per the quotes that were provided.

5. The lender will receive the inspection report from the appraiser and validate that the work has been completed in a good manner and as per the quotes provided. They will instruct the lawyer that they are able to release the funds to you to pay the contractor.

If you think this program might work for you or someone you know, call me for further details.