A huge number of self employed people approved for a mortgage in 2011 wouldn’t qualify for the same mortgage today since Canada’s financial regulator introduced Guideline B-20 as a way of tightening up the banks’ approval processes in the summer of 2012.
Part of B-20 requires banks to examine incomes more closely, but where does that leave self-employed people, who have had more trouble getting mortgages since that rule was brought in?
This caught a lot of self-employed people off guard when they were probably not used to having any real issues with arranging financing in the past.
The main problem for self-employed workers is that they typically lower their taxable income through business expenses and other deductions, so what they declare is often an inaccurate reflection of their true incomes. In the past, they were able to simply declare their incomes and provide proof of self-employment, along with other documentation.
Today, self-employed individuals can still apply for a stated income mortgage at some banks, but B-20 also means that they need to put up at least a 35-per-cent down payment to avoid purchasing default insurance from the likes of Genworth Canada or Canada Mortgage and Housing Corp., Canada’s two largest mortgage insurers.
So what can they do to ensure that they can obtain the kind of mortgage they need? According to many experts, it all starts with how much income you’re declaring when you file your taxes.
The key is to declare as much money as possible and not hide any funds. At the end of the day, you are either paying Revenue Canada or you’re paying alot more to borrow the money.
The new normal is for self-employed home-owners to submit a detailed, accountant-prepared T1 General Tax return, in full – not just the four-page summary that many people turn in and notice of assessment to confirm that no taxes are owing.
The Line 150 on the T1 General & NOA is the magic number. This is the number all lenders look at for income qualification. So how much income are they looking for?
For mortgage qualification, obviously your line 150 number depends on how much loan you are needing. As a rule of thumb people should at least claim $90,000-$100,000 if you want to continue purchasing investment real estate.
If you are just looking to purchase a principal residence, you will need to show an average two-year income high enough to qualify for the mortgage you need. Again, this amount will depend on the mortgage amount needed.
Also, for a self – employed person to qualify, there is a minimum 2 years of being in business. With in mind, if you are newly self-employed and planning a real estate purchase, you’re better off building up your business for 2 years before applying for a mortgage.
It is important to note that the conversation in this article has been for self – employed people to mortgage qualify at major banks. For those who don’t qualify via the banks and other A-list lenders, there are other routes, such as credit unions or MICs, that are not subject to the B-20 regulations and can take on more risk from their borrowers. These are known as alternative lenders.
Many alternative lending channels use gross income. Often they are OK with bank statements that show you have income coming in but you’re just not declaring it. These loans come at a higher cost, however.
In the end it comes down to whether or not self-employed people are willing to pay interest premium and the higher down payments required with a B or private lender, versus arranging affairs in such a way the income personally on your notice of assessment reflects a higher level.
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