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Mortgages for Self-Employed

Did you know that one in six (16%) of working Canadians are self-employed? If this is you, read on.

As a result of sloppy mortgage lending practices starting in the mid-1990s and peaking in 2006, particularly in the USA and the subsequent global recession, the world's leading economies sunsequently met and created a new set of standard mortgage lending guidelines for essentially the world.  In Canada, the new rules called "OSFI B-20" took full effect in late 2012, and then in November 2014 round 2 or OSFI B-21 was finalized further aimed at enforcing conistenancy in mortgage underwriting and approvals. 

These new rules create significant challenges for self-employed seeking mortgage financing who cannot easily confirm they make enough income to safely pay their mortgage and other debts.  Let's take a closer look at how a self-employed borrower can prove their income:

  1. Traditional Income Confirmation (the norm for employees) means that 1) you do make money, 2) your income is sufficient to support the mortgage payment and your other debts, and 3) you consistently report the income on your personal tax returns. If so, you can get a mortgage with as little as 5% down payment.
  2. Non Traditional Income Confirmation means that 1) you do make money, 2) you can prove you make enough money with a combination of banking statements, business financial statements, business tax returns, etc., but 3) the income does not show up on your personal tax returns.  If this is you, your minimum down payment is now 10%, your interest rate is a touch higher, an insurance risk premium (up to 2% more) is added to your mortgage balance, and the types of property you can own are restricted :/ .
  3. Stated Income means you are unable to confirm your income and federally-regulated banks must tag your mortgage as "non-conforming."  If this is you, your down payment will likely need to be at least 20% and as much as 35%, interest rates are higher, and further restrictions on the type and location of the property you can finance are added to the mix.  Private or alternate lending sources have stepped up to fill the gap, as B20/21 has forced the banks to bow out.

 

Graph of percentage of self employed workers vs total work force in Canada

In summary, the time-tested advice for business owners of minimizing your income by maximizing your expenses could BITE YOU HARD at mortgage time and could lead to either a "rejected" outcome, or added expense, headaches and restrictions.

The Good News:

  • The good news is that a competent Mortgage Planner in conjunction with your Accountant can help you manage these B20/21 rules.
  • Whether you are already self-employed or considering it, please get us involved early, and allow us enough time to help you adjust. 
  • We call it managing your Line 150, which is the total income you report on your personal tax return, and there are a number of options. 

To get a complimentary situation assessment, let's talk.  Please click the link below and send us a few details about your situation.

 

LET'S TALK!

 

Home Buyer Pre-Assessment Questionnaire

Self Employed Mortgage & Unpaid Income Tax

Cartoon of man confused about taxesIt's important to be current with your Income Tax, as it impacts your ability to qualify for a mortgage in Canada (or not).

SUPER-PRIORITY - ouch. What the heck is that and why should I care? If you want to get a mortgage and income tax isn't you favourite topic, time to learn.

It is very important to understand the term Superpriority Claim, which simply means Canada Revenue Agency can put a claim on all your assets if you don't pay your taxes, including seizing and selling your house! Mortgage lenders don't like that as it puts them second in line to get paid back and there might not be enough money left over for that. Notice neither the CRA nor the bank will care about you when this happens - they are just going to squabble over who gets the house and the CRA is going to win. So lenders will not lend you money if you cannot prove you are current with your income taxes! (This applies to all secured-loans, including vehicles.)

Your Notice of Assessment is an important document that you get back from the CRA after you file your taxes - it says the CRA agrees (or not) with your tax filing. While many of us tend to focus on the refund cheque (hopefully), mortgage lenders are focusing on if you owe money and will require you to prove your taxes have been paid before lending. When you get your NOA back, immediately file it with your other tax documents. If you don't have a filing system, you can get an accordion filing folder for as little as $7 at Wal-Mart.

If you have misplaced a NOA, call the CRA at 1.800.959.8281 and request a replacement or an "Income & Deduction Summary", which can be used as a substitute. 

BFS: Business For Self

Also important for a borrower with non-guaranteed employment hours (or self-employed), you can use your NOAs (average of last 2) to prove what income you earn for mortgage qualifying.  Even if you have guaranteed hours, you can get credit for overtime worked using the NOAs. So file them safely!

Self-employed, especially newly business-for-self (or "BFS" as we call you), please be very aware of income proof and income tax train-wrecks. Here's what happens: you start your business, the coin starts rolling in, but you don't set any aside for taxes because CRA does not yet require you to make monthly or quarterly tax payment installments. So the money disappears until at some point you try to get a loan and discover you can't prove via a current NOA that 1) you are current with your personal taxes, or 2) that you actually earn income (line 150)! Guess what? The Government wants you to pay taxes and they have it all figured out. So you finally do your taxes to discover not only do you have back-taxes owing, you also have future tax installment payments to start making, and your down payment savings and cash flow just dried up! So did the prospect of getting a mortgage any time soon. Don't go there - contact us if you need an accountant referral.

A final word on BFS. While your accountant might suggest that you maximize business expense deductions to minimize the taxes you owe, this can be a double-edged sword if you also want a mortgage any time soon. Low personal income (per Line 150 of your NOA) usually means you limit how much of a mortgage you can qualify for. I think a better BFS tax-reduction strategy is to contribute to an RRSP with after-tax dollars, then - if you are eligible - use the First Time Home Buyer Plan to take the money out for down payment tax-free.

Still have questions?

 LET'S TALK!

 

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