Why, why, why it is so challenging for entrepreneurs to obtain a mortgage in Canada?
If you’re among the 2.7 million Canadians who are self-employed, regrettably your income is not as easy to document as someone who’s traditionally employed.

Since 2008, mortgage regulations in Canada have made it more challenging for those who work for themselves to qualify for a mortgage due to tighter restrictions on “stated income” loans. In 2012, Canada’s Office of the Superintendent of Financial Institutions (OSFI) introduced Guideline B-20, which requires federally regulated banks to evaluate applications for residential mortgages and home equity lines of credit with more scrutiny. These rulings made it more challenging for the self-employed to prove income.

Here’s what Self-Employed home buyers need to know:

1. Most self-employed are motivated to decrease their earnings to avoid paying tax through legitimate expenses and personal deductions.
-Therefore, much of one’s self-employed income does not show up on paper.

2. I’m sorry… but you can’t have your cake and eat it too! If you choose to write off as much of your income as legally possible to avoid paying taxes, claiming low take-home pay, you will end up paying a higher interest rate on your mortgage.
– i.e. home buyer is a tradesperson, they earn $70,000/year and legitimately write off their business expenses to $40,000/year on Line 150 of their tax return. Lenders use income from Line 150… not gross income to determine affordability.
– Some lenders allow you to “gross up” your declared taxable income (as opposed to stated income) by adding up to 15%.
– i.e. if your declared income on your Notice of Assessment (NOA) is $40,000, the lender could add 15% for a total of $46,000. In most cases this doesn’t really help the business owner, as their income is still too low to qualify for the mortgage they want.

3. The new mortgage rules mean the assessment of a self-employed applicant’s income has become far more rigorous. Lenders now analyze the average income for the industry a self-employed candidate works in, and study the person’s employment history and earnings in the field. Their stated income should be reasonable, based on:
– industry sector
– type of business
– length of time the operation has been in business

4. Work with professionals. You need to hire a qualified book keeper and a Chartered Professional Accountant (CPA). Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
– You need to keep all your financial affairs up to date. That means getting the accountant prepared financials, filing your annual tax returns and most importantly paying your taxes. Government always gets first dibs on any money. Lenders won’t be interested in you haven’t paid your taxes.
– I recommend having a discussion with your CPA. Let them know that you want to buy a home. Come up with a budget of what income you need to be able to prove on your tax returns.

Suggestion: you could choose to pay more personal income tax this year, to push your line 150 income up and help you qualify for any mortgage transactions you hope to make. Please note: most lenders will want to see 2 years history, to prove consistency in earnings.

5. For self-employed borrowers, being able to document income for the past 2-3 years gives you more lending options. Some of the documents your lender may request include:
– Credit bureau (within 30 days of purchase)
– Personal tax Notice of Assessment (NOA) for the previous two to three years.
– Proof that you have paid HST and/or GST in full.
– Financial statements for your business prepared by a Chartered Professional Accountant (CPA).
– Contracts showing your expected revenue for the coming years (if applicable).
– Copies of your Article of Incorporation (if applicable).
– Proof that you are a principal owner in the business.
– Business or GST license or Article of Incorporation

6. If you have less than 20% down payment, Genworth is the only option of the 3 mortgage default insurers that still has a stated income program.

Self-employed home buyers, who can document proof of income, can generally access the same mortgage products and rates as traditional borrowers.

Tips for self-employed applying for a mortgage to ensure the process goes smoothly:

1. Get your finances in order. Pay down your debt!!
– Every $400/month in loan payments lowers your mortgage eligibility by $100,000
– Every $12,000 in credit card debt lowers your mortgage eligibility by $100,000
– Do you see a theme here? Pay down your debt! Resist buying/leasing a new vehicle or taking on any additional debt prior to buying your home

2. 3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada
– Debt-service ratios are a major factor in a loan-approval assessment based on your provable income (Line 150 – what you paid taxes on)
– Maintain good credit.

– Consider a larger down-payment.
– If you run into difficulty qualifying on your own, consider having someone co-sign for your mortgage.

3. Have two to three years’ worth of your self-employed supporting documentation available so your mortgage broker can work with you to set up your Mortgage Preapproval.

4. Be consistent and show stability. Lenders prefer self-employed borrowers who work in a business that’s established and have expertise in that field.

What happens if the banks still don’t want you for a conventional mortgage?

Many high net worth business owners with low stated incomes turn to private mortgage lenders for financing, since they can’t prove their income.
It is difficult to navigate which lenders specialize in self-employed mortgages. Using a mortgage broker has obvious advantages, since mortgage brokers have access to multiple lenders and have a broad knowledge of the mortgage market.

If you have any questions, contact a Dominion Lending Centres mortgage specialist for help.

Your credit score is a big factor when you apply for a mortgage. It can dictate how good your interest rate will be and the type of mortgage you qualify for.

Mortgage Professionals are experienced helping clients with a wide range of credit scores so we can find you a mortgage product even if your credit is far from perfect.

The good news about your credit score is that it can be improved:

• Stop looking for more credit. If you’re frequently seeking credit that can affect your score as can the size of the balances you carry. Every time you apply for credit there is a hard credit check. It is particularly important that you not apply for a credit card in the six months leading up to your mortgage application. These credit checks may stay on your file for up to three years.
• If your credit card is maxed out all the time, that’s going to hurt your credit score. Make some small monthly regular payments to reduce your balance and start using your debit card more. It’s important that you try to keep your balance under 30% or even 20% of your credit limit.
• It’s also important to make your credit payments on time. People are often surprised that not paying their cell phone bill can hurt their credit score in the same way as not making their mortgage payment.
• You should use your credit cards at least every few months. That’s so its use is reported to credit reporting agencies. As long as you pay the balance off quickly you won’t pay any interest.
• You may wish to consider special credit cards used to rebuild credit. You simply make a deposit on the card and you get a credit limit for the value of that deposit. They are easy to get because the credit card company isn’t taking any risks.

Contact a Dominion Lending Centres Mortgage Professional if you have any questions.

Ask people this question and you will get a variety of answers.  Most home owners will say 10% is what you should put down. However, if you speak with your grandparents, they are likely to suggest that 20% is what you need for a down payment.

The truth is 5% is the minimum down payment that you can make on a home in Canada. If you are planning on buying a $200,000 home then you need $10,000.

It all can be explained by the creation of the Canadian Mortgage and Housing corporation (CMHC) by the Canadian government on January 1^st, 1946. Before this time, you needed to have 20% down payment to purchase a home . This made home ownership difficult for many Canadians. CMHC  was created to ease home ownership. This was done by offering mortgage default insurance. Basically what CMHC does is it guarantees that you will not default on your mortgage payments. If you do, they will reimburse the lender who gave you the mortgage up to 100% of what the homeowner borrowed. In return lenders allow you to purchase a home with a smaller down payment and a lower interest rate.

CMHC charges an insurance premium for this service to cover any losses that may occur from defaulted mortgages. This program was so successful that CMHC lowered the minimum down payment to 5% in the 1980’s.

However, if you have little credit history or some late payments in the past they may ask you to provide 10% instead of the tradition 5% if they feel there is a risk that you may default at some time.

You should also be aware that the more money you put down, the lower your monthly mortgage payments will be. You also can save thousands in mortgage default insurance premiums by putting 20% down.  At this time,  home buyers who put 5% down have to pay a fee of 4% to CMHC or one of the other mortgage default insurers to obtain home financing. On a $400,000 home this is close to $16,000.

If you can provide a 10% down payment the insurance premium falls to 3.10% and if you can provide 20% it drops to zero.  While 20% can seem like an impossible amount to save, you can use a combination of savings, a gift from family and/or a portion of your RRSP savings to achieve this figure. The best recommendation that I can make is to speak with your Dominion Lending Centres mortgage professional to discuss your options and where to start on your home buying adventure.