mortgages for self employed canadians

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mortgages for self employed canadians

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 ‘SELF-EMPLOYED’  OR  ‘BUSINESS FOR SELF’  MORTGAGES

Self-employed people tend to expense as much as possible so as to reduce their tax liability resulting in lower reported incomes to the Govt. Banks worry that if income cannot be verified then they are at risk of the borrower defaulting. Fortunately we have many non bank lenders who will fund mortgages for the self-employed on ‘Stated Income’.

LENDERS WHO SPECIALIZE IN SELF-EMPLOYED MORTGAGES

Non-bank lenders such as credit unions, financial institutions, trusts etc are very happy to lend money to the self-employed. Self-employed people as a group tend to have high net worth, excellent credit ratings and historically have proven to be good borrowers.

WHAT DOCUMENTS ARE REQUIREMENTS FOR SELF-EMPLOYED MORTGAGES?

You will need:

  • 2 years of Notice of Assessments
  • T1 and/or T2 Generals
  • HST statements to prove that you don’t owe money to the Government.
  • Articles of Incorporation or business license.

Because of tax write offs etc there will be a difference between your Govt declared income and your true income. Lenders who specialize in ‘Self Employed Mortgages’ recognize this and allow you to ‘State Income.’  ‘Stated Income Declaration’ involves the lender looking at your industry and determining the average income of someone in the same employment.

‘Stated Income’ is a complicated method to assess income and you will need to show as much as possible to substantiate your earnings this can include financials (ideally from an accountant), banks statements showing cash flow (6 months), and future contracts with customers. The more proof of you have to substantiate your position the better it looks to the lender. Most lenders require a minimum two-year track record of earnings, without 2 years a private Lender below might be the best option.

MORTGAGE DEFAULT INSURANCE FOR SELF EMPLOYED MORTGAGES

If you can prove income through your Notice of Assessments (like a standard employee) then you can get a mortgage with 5% down, if you can’t prove income you will need to put at least 10% down. If you put 20% or more down then you won’t need mortgage default insurance and the Lenders can be more flexible. Default Insurers info below.

SHORT TERM PRIVATE FUNDING FOR SELF EMPLOYED MORTGAGES

If you don’t quite qualify at the moment for the lower rates but will soon then a private mortgage can fill the gap. A private mortgage for 12 months or less, can give yourself time to improve your credit score or top off a two-year self-employed period to set yourself up for a ‘Stated Income mortgage. Private lending offers flexible, convenient solutions and will have higher interest rates plus lender/brokers fees. Private lenders are often business-minded individuals or syndicates with high liquidity. Private financing is a short term solution for a long term plan.

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Among others we have one lender that has nine ‘Self Employed Programs’ and another lender with an insured ‘Stated Income’ program with 10% down.

HOW TO GET THE BEST SELF EMPLOYED MORTGAGE POSSIBLE

  • Plan Ahead:

Consider your position on debt, expenses or business growth? Set your finances up through a certified accountant.  Lenders prefer to see self-employed income submitted through a professional. Make sure to discuss with them your mortgage objectives so they can set up your taxes appropriately.

  • Be Organized:

Keep your financial statements, tax returns, T1 Generals, Notices of Assessment, etc. in good order. Keep them organized and accessible. Most importantly, have your taxes up to date! By having your documents in order and available to the lender, it helps instill confidence, thus helping you secure more favourable rates and terms.

  • Get your finances in order:

It is important to have the best credit history possible, so review and repair if need be. Pay down debt; debt-service ratios are a major factor in a loan-approval assessment. Consider using your savings to make a larger down-payment.  Maybe have someone co-sign for the mortgage, be aware that a co-signer will also get title ownership to the property.

  • Stay consistent:

Lenders prefer that the self-employed work in a business that they’re familiar with and have expertise and experience in the field. The same for residential history; lenders prefer that you don’t move too much. Lenders like consistency and stability.

MORTGAGE DEFAULT INSURANCE FOR THE SELF EMPLOYED

If you’re putting down less than 20% then you will need ‘Mortgage Default Insurance’ from one of Canada’s three Insurers: GENWORTH, CMHC and CANADA GUARANTY, all 3 have streamlined products for Self-Employed Borrowers.Your broker will arrange this for you.

Their programs are designed for self-employed borrowers who are unable to provide traditional income verification but have a proven 2-year history of managing their credit and finances responsibly. Eligible borrowers typically own a small size business for a minimum of two years, which can be confirmed via a third-party arm’s length document. In addition, the borrower is required to declare their annual income and annual business revenue, which should be reasonable based on the industry, length of operation and type of business.

You can find more info about their special self employed programs here : GENWORTH or CMHC or CANADA GUARANTY.

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