Reviewing article: "The bank said no - now what?"

Good afternoon Montreal Real Estate world. Today, I am reviewing an article that caught my eye in the National Post entitled "The bank said no - now what?" Susan Smith does a great job painting the current mortgage landscape and impact of the post-2008 Federal Government rule changes. However, I'd add a couple things. Susan Smith discusses how the rules changes have impacted certain consumers, I shall solely focus on the self-employed.

The Self Employed: Okay, here is the unplugged truth for anyone self employed. Is it really harder for self employed people to qualify for a mortgage? I'd say it depends on your specific circumstances (declaring income and credit quality are the usual suspects). According to Susan, "The government...tightened requirements for the self-employed, requiring independent validation of income statements." In other words, the Federal Government is forcing the self employed to declare more income on their income taxes. It is much harder to get a mortgage with an "A-lender" under the self employed program without declaring anything reasonable. For example, the most common insured self-employed program would be Genworth's Alt-A program. They require strong credit history, a +680 score, incomes taxes to be filed and up-to-date for 2 years, and no income tax arrears owed. Generally, when applying for a mortgage your income declared on line 150 of your notice of assessment can be multiplied by 2-2.5 of the stated income. Usually, this type of financing referred as "common sense financing." In other words, say you are a plumber or electrician declaring $45,000 personally hence we may be able to an auto-declared income under this program at $90,000 in order to qualify for your mortgage. In such cases your mortgage would incur an extra mortgage insurance premium.

As the article points out, there are alternative lender options like Home Trust or Equitable Bank that exist. Using an alternative bank the interest rate can be between approximately between 3.89-6.99% depending on the term. Rates here as understandably based on risk. The "country’s 2.75 million self-employed workers – a group that, according to Statistics Canada, has a higher median net worth than paid employees." Self employed individuals are made out to sound more risky compared than salaried individuals. The self employed must declare more income whether we like it or not. Sometimes it makes sense to work with an alternative lender for 1-3 years but with a mortgage plan you can switch to an "A -lender" thereafter depending on your circumstances. 

The article mentions private lender, I shall write a separate blog entry on that subject.  

Self-employed and thinking of buying?

Hard to believe but another amazing week has flown by andnow we’re already into the month of October. A topic that I get askedfrequently about is first time buyers that are self-employed. Inother words, individuals that own their own registered company or professionssuch as independent copy-writers or truck drivers that are looking to buy ahome.  If it sounds like you fit in one of these categories then here area couple suggestions to help you get closer to qualifying for a mortgage.

First, whether you have your own registered company or notplease file both Federal and Provincial income taxes (personal and business) ontime. I know it sounds very basic but I’ve seen many mortgages both residentialand commercial either delayed or cancelled because the client has not filed. Ifyou are thinking of buying in the near future and your 2010 Notice ofAssessments show that you owe balance to either Government please pay offthe balance and keep proof of payment. More and more banks are asking to seethis documented.

Next, figuring out your buying capacity as a self-employedperson is the next order of business. In Canada, we can pin-point your incomebased on an average of 2 years notice of assessment and/or having a look atyour financial statements (specifically gross annual sales) for your company.The general rule of thumb is that figuring out your income needs to make sense.Banks typically balance between personal and business assessments to figure outone’s overall personal income. As a self-employed individual, we generateincome but we tend to expense as much as possible, hence why our Notice ofAssessments can show low declared income. Some of those expenses can bemade with a registered company.

Finally, if your income is solely based on an average ofyour Notice of Assessments then you can put a minimum of 5% down. Ifhowever, your income is qualified on your Notice of Assessments andbusiness’ financial statements or “self-declared sales” then you will berequired to put 10% down. This rule applies to all banks in Canada.

If you have any specific questions you’d like to discuss innext week’s article please feel free to email me.