Mortgages for Self-Employed Borrowers

Self employed people seemingly have two realities when seeking a mortgage these days: declare more income and pay higher taxes, or show lower income and pay higher interest rates. All in part to some major rule changes made in 2014 by OSFI (the Office of the Superintendent of Financial Institutions), who introduced a guideline change known as B-20 for FRFIs (Federally Regulated Financial Institutions) to follow. Even though the rule came into effect in 2014, lenders had until their fiscal year end to implement, which meant that we are just starting to truly see the effect of the changes recently.

“This Guideline sets out OSFI’s expectations for prudent residential mortgage underwriting.”

There were several recommendations OSFI sets out in these recent changes to mortgages, and we will focus on the specific changes to self-employed income earners, primarily – “Principle 3: FRFIs should adequately assess the borrower’s capacity to service his/her debt obligations on a timely basis”

OSFI’s Rule Change

OSFI: “A borrower’s income is a key factor in the assessment of their capacity to repay the mortgage loan, and verification of income helps detect and deter fraud. FRFIs should make reasonable inquiries and take reasonable steps to verify a borrower’s underlying income. This includes substantiation of:”

Notations in red highlight the comments below each OSFI point.

  • Employment status; and
    • To prove self-employment, there are a number of items available: business license, GST filing, corporate annual return, personal income tax returns including section T2125 – Statement of Business Activities, audited financial statements, articles of incorporation (or a recent corporation search from a Registry Office)
  • The income history of the borrower.
    • More below, typically a 2-year average

OSFI: “For borrowers who are self-employed, FRFIs should take reasonable steps to obtain income verification (e.g., Notice of Assessment) and relevant business documentation. In determining the reasonableness of the documentation used to support the income, sound practice suggests that:”

  • The income amount is verified by an independent source;
    • Typically, lenders are asking for this documentation to come from a third party source such as accountant-prepared financials. In the case of a sole proprietor, or those who prepare their own corporate tax returns, be prepared to supply additional supporting documents
  • The verification source is difficult to falsify;
    • This speaks to the first item; supplied documentation from third party
  • The verification source directly addresses the amount of the declared income; and
    • Verification can include Notice of Assessment (NOA) from Canada Revenue Agency (CRA)
    • If there are taxes owing, it will need to be paid prior or supply proof it has already been paid
    • Additional proof can be requested that include: previous NOAs from the year before for a 2-year average, personal income tax returns including section T2125 – Statement of Business Activities, or even business bank statements
  • The income verification information/documentation does not contradict other information provided by the borrower in the underwriting process.”
    • Pretty straight forward and this is what the verification is meant to serve in the process. An example would be if the NOA income does not match the income tax returns.

Option A: Verified Income

What lenders are seeking for an approval with verified self-employed income:

  • proof of self-employment for 2 years
  • prove type of business owned (landscaping, bookkeeping, etc)
  • prove ownership structure (sole proprietor or incorporation) and percentage of ownership
  • minimum 5% own down payment
  • 2 year’s of accountant-prepared financial statements
  • 2 year’s personal tax returns with T2125 Statement of Business Activities (sole proprietors)
  • most recent year’s and past year’s NOA’s to confirm no tax arrears and perform an average
  • additional documentation may be requested

With verified income, you can obtain regular mortgage terms, best rates, and obtain approval with as little as 5% down. If you are unable to supply these documents, then the application process will need to change to support a different approach.

Option B: Stated Income

Former guidelines have changed, and CMHC no longer supports Stated Income applications as of 2014 as well. That leaves insurer Genworth with their Business For Self Program Alt-A Program and Canada Guaranty’s (CG) Low Doc Advantage™ Program. Since CMHC’s exit from this program, Genworth has been the go-to, and not every lender is on board with using Canada Guaranty.

The highlights for this program are similar for the remaining insurers:

  • proof of self-employment for 2 years
  • prove type of business owned (landscaping, bookkeeping, etc)
  • prove ownership structure (sole proprietor or incorporation) and percentage of ownership
  • minimum 10% own down payment, none of which can be borrowed
  • reasonability of income used in relation to the length of time in operation, type and size of business, and should be able to debt service standard guidelines for GDS/TDS
  • include line 150 from most recent NOA
  • stated gross revenue from borrower’s business
  • no mortgage arrears in the past 5-7 years
  • no credit delinquencies in the past 12 months
  • no previous bankruptcies
  • commission sales income is not eligible under this program
  • recent year NOA confirms no tax arrears
  • additional documentation may be requested
  • higher than standard mortgage insurance premiums

It is quite a bit more paperwork than in the past from even 2 years ago, and the verification test of “reasonable income” in relation to actual-earned income has quashed many an application. Many lenders require an application be insured by the insurers from 10% down payment all the way up to 34.99% down payment using stated guidelines. In this case, 20% down does not bypass the insurable requirements for mortgage insurance. At the 35% point and more down payment, the rules lessen with traditional lenders using equity lending guidelines.

Option C: Alternative Lending

Lenders can be a bit more liberal, but here is where it can start to get expensive. Guidelines for approval with alternative lenders (sometimes known as “B” lender or subprime lenders) can include:

  • proof of self-employment for 2 years
  • prove type of business owned (landscaping, bookkeeping, etc)
  • prove ownership structure (sole proprietor or incorporation) and percentage of ownership
  • larger down payment, 25%-35% of the purchase price to not require the insurers premium
  • cost of an appraisal, as dependency will be on the collateral or property
  • recent year NOA confirms no tax arrears
  • business bank statements ranging from 3-12 months depending on lender’s policy or requirement
  • higher interest rates will apply based on risk-based pricing and down payment
  • additional documentation may be requested
  • lender and broker fees can also apply in most cases

This blog updates a previously published blog article from 2014 on the same topic with more detail pertaining to each option available. The guidelines presented are taken from various sources, and not intended to be all-inclusive of every lender policy available. Policy guidelines are fluid, often vary from the insurer’s basic requirements, and subject to change at any time. Check with your Broker or lender directly for specific examples to your individual circumstance. Have more questions? Let me know how I can help!

Mark Brennan
Mortgage Broker

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Down payment increasing for homes over $500,000

Today, Finance Minister Bill Morneau, announced that the government is increasing the down payment requirements for homebuyers seeking to purchase properties over $500,000 up to $1,000,000 effective February 15, 2016. The move is designed to cool down the real estate market in Toronto and Vancouver, but could also have some effects here locally.

The main consideration will be regarding the down payment amount will increase. This change is only for home purchases, and will not affect existing homeowners. What is important to note is that the new rule only applies for the amount in excess of $500,000.

Conclusion: This may spur an early spring market for homes in that price point in an effort to get ahead of the rule change. Morneau had noted that the change will affect only about “1% or less of the population” in a news conference today. The plus side is you are putting in more towards your purchase, and will be building equity faster.

Mark Brennan
Mortgage Broker

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Golden Rules Of Renovation

The Canadian Renovator’s Council of the Canadian Home Builders’ Association offers a number of golden rules to help renovating homeowners achieve their goals.

  • Know what you want. Take the time you need to explore the possibilities for your home and develop a firm plan. Begins with the fundamentals-what do you need and how you want your “new” home to look, feel and work for you and your family.
  • Set a realistic budget. Decide as early as possible how much money you want to spend-this allows you and your renovator to focus on the work that is doable within that budget. Experienced renovators can provide sound cost advice.
  • Plan for the long term. Thinking ahead avoids short-term renovations that may need to be redone in the future. Discuss your short- and long-term goals openly with your renovator. Professional renovators can conduct a thorough inspection of your home and offer suggestions for the most effective sequencing of work over a period of time.
  • Don’t jeopardize the quality of your renovation by compromising on the quality of products or materials. If it’s worth doing, it’s worth doing well, and that means using products that offer the right combination of performance, durability and aesthetics.
  • Don’t choose a renovator on price alone. While it is always tempting to go for the lowest price, you need to consider the implications of doing so. Does the renovator understand what’s involved in your project and have the necessary experience? Will the renovator offer a warranty on the work? Will the renovator still be in business if you need to call back?
  • Protect yourself. Dealing with a professional renovator is your greatest protection against an incompetent or unfinished job. A written contract spells out the arrangements between you and your renovator and describes your renovation in detail. Professional renovators also carry Worker’s Compensation, liability insurance and any licenses required by your province.
  • And don’t buy from a door to door salesperson without carefully checking out the company. Before you enter into any kind of agreement, talk with friends and family. Contact your local Home Builders’ Association to see if the company is a member. Also check with the Better Business Bureau to see if anyone has lodged a complaint against the company.

(Source: Canadian Home Builders Association)

Ask me about various programs to finance renovation costs upfront using the Purchase Plus Improvement progam, accessing your equity through a refinance, HELOC, or obtaining a second mortgage.

Mark Brennan
Mortgage Broker

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6 Months to a Better Budget

One of the challenges with proper budgeting is that it has to become habitual in order to be effective. You can survive without knowing how to budget if you manage to keep more money coming in rather than going out or have credit cards to cover the gap, but this won’t last forever.

Emergency Fund

The crux of this six-month plan is the emergency fund. Ideally, everyone should have at least one or two months’ wages sitting in a money market account for any unpleasant surprises. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. You will want to build your emergency fund as quickly as possible. The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it and, if possible, putting in whatever you can spare on top.

What’s an Emergency?

You should only use the emergency money for true emergencies: like when you drive to work but your muffler stays at home. Covering regular purchases like clothes and food do not count, even if you used your credit card to buy them.

Downsize and Substitute

Now that you have a buffer between you and more high-interest debt, it is time to start the process of downsizing. It’s odd that the natural solution to “not enough money” seems to be increasing income rather than decreasing spending, but this backwards approach is very familiar to debt counselors. The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest. This can be a process of substitution as much as elimination. For example, if you buy coffee from a fancy coffee shop every morning, you could just as easily purchase a coffee maker with a grinder and make your own, saving more money over the long term.

Focus on Rewards

Another trick that will help your budget come together faster is to focus on the rewards. A mixture of long- and short-term goals will help keep you motivated. This can be as simple as saving for a small luxury, or even something bigger like buying a car with cash. Watching these goals slowly but surely become a reality can be very satisfying and provide further motivation to work harder at your budget.

Find New Sources of Income

Why isn’t this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out, you can start investing to create more income.

Now, it is possible that it will take you more than six months to get your budget balanced out as it all depends on your situation, including how much or what kind of debt you have. But, even if it does take you longer than six months to get your budget turned around, it is time well spent.


Mark Brennan
Mortgage Broker


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