Self-employed? Navigating through the recent mortgage rule changes

  For years, the self-employed could count on getting a mortgage on the strength of their credit score, and on their word that they were earning enough from their business to repay the loan.

These days, because of rules brought in almost two years ago by the regulator of Canada’s chartered banks, borrowing money to buy a home has become harder for many of the country’s 2.75 million self-employed workers.

In the summer of 2012, the Office of the Superintendent of Financial Institutions introduced Guideline B-20, which required federally regulated banks to tighten their processes for approving mortgages and home equity lines of credit. As part of B-20, banks must now look more closely at incomes before approving a mortgage application.

This presents a problem for self-employed workers, who typically lower their taxable income by maximizing business expenses and personal deductions. Because of the discrepancy between what’s on their tax return and how much money they actually earn, self-employed workers have typically obtained their mortgage through “stated income” applications, which required a signed income declaration and proof of self-employment such as a business registration number or articles of incorporation.

Today, self-employed workers can still apply for a stated income mortgage at some banks, but under B-20 they can borrow only 65 per cent of the purchase value – 10 per cent less than what was allowed before B-20 – without requiring default insurance from Canada Mortgage Housing Corp., Genworth Canada or Canada Guaranty.

If you have less than 35-per-cent down payment, your mortgage now has to be insured, and insurers have specific guidelines that you need to meet. CMHC will allow a stated income application as long as you have been self-employed for less than three years. More than three years and you have to qualify according to your net taxable income.

So what can the self-employed do to improve their chances of qualifying for the mortgage they need, on terms that work for them?

• Providing complete and current financial and tax documents is critical. Which includes the latest notice of assessment from Canada Revenue Agency and financial statements from the past two years.
• Bank statements to show regular income going into your bank account may also be required.
• Make sure you are up-to-date with income and sales tax returns, and that you don’t owe taxes.
• The more information you can provide the a bank about your business the better it can help self-employed borrowers qualify for the mortgage they want.
• Certain lenders allow add backs of things like car expenses, capital cost allowance or housing expenses. these add backs may enable an applicant to qualify.
• Some lenders take a different approach to increase the mortgage eligibility of self-employed workers for example adding 15 per cent to reported income if the self-employed borrower provides financial statements showing deducted business expenses totalled 15 per cent or more.
• Note that credit unions are not affected by B-20 and many still extend a mortgage of up to 80 per cent of purchase value to stated-income applicants without the need for default insurance.
• For sole proprietors or owners of an unincorporated business, making the leap to incorporation may also help. Most banks prefer salary, and if you have a corporation you can pay yourself a salary. That may make it easier for a self-employed individual to qualify for a mortgage.

Incorporating could also reduce tax rates and allow the business owner to collect a higher salary or dividend payout.

Posted by Steven Porter, Broker  -  RE/MAX Aboutowne Realty Corp., Brokerage
based on a story in Globe & Mail titled More self-employed mortgage wall because of recent rule changes