Self employed mortgage options

As we discussed in the “building blocks of your mortgage” section, mortgages are made up of a sum of our down payment, credit, and income.  In the case of many self employed clients, they have the flexibility to show less personal income in lieu of their write offs in the case of a sole proprietor, and retained earnings in the case of a corporation.  For self employed mortgage lending in Canada, many lenders have specialized and unique programs that allow for more flexible income underwriting in lieu of stronger down payment and good credit.

The government, through their bill called B-20, has made changes that lenders have since implemented that place much stronger restrictions upon how lenders determine reasonable income for self employed clients. The below  options are assuming we do not fit the “traditional income ratios” discussed previously.  Prior to the government changes we would often confirm that our clients were self employed and the length of their self employment.  After that we would use a “reasonable” income based upon their industry and proceed with their approval.  This methodology has since changed, I have included below the current flexible self employed mortgage options.

Insured mortgage option with as little at 10% down payment:

Through Canada Guaranty and Genworth we also have  program where we are able to state a reasonable income for our clients who have two years of self employed history.  The advantage to this program is we tend to receive more common sense underwriting where the insurers will use your company financial statements to determine your actual income.

The minimum down payment is 10% from your own savings or investments , we do receive best rates and terms however the disadvantage is that the insurers increase their insurance premiums for this program.  The insurance increases from 2.0% with a traditional income verified mortgage to 4.75% due to the flexible nature of our income.  This program is also available with 15% down payment with a reduced insurance premium of 2.9%

 

The bundle mortgage option with 15% down payment:

With this option we are able to combine a self employed specialized mortgage with a small private second mortgage to achieve an 85% loan to value mortgage.

This is available for purchase and refinances but is typically limited to major urban centres

The pricing for this product has a higher base rate than the 15% down payment insured mortgage above but typically only has a 1% fee versus a 2.9% fee

This is a shorter term mortgage of usually one or two years after which time we work to transition our clients to an 80% loan to value mortgage with stronger rates and terms

 

The “behind the scenes” insured mortgage option with 20% down payment:

Many of our trust company based lenders offer this self employed mortgage solution.  They will often offer it with good rates that are a bit above best rates and terms.

How the process works is the lender will approve your 20% down payment mortgage based upon similar guidelines to the “Genworth and Canada Guaranty insured mortgage option with 10% down payment” above.  Once the lender approves it they submit it to the insurer for their approval, typically as the down payment is increased the insurer has a bit more approval ability than with 10% down payment.  Once the insurer approves your mortgage the lender will issue an approval as well.  The reason why I refer to this as the “behind the scenes” insured mortgage is the lender will not often add the insurance to your mortgage, rather they will increase your interest rate from best rates to good rates in proportion to the insurance amount that they are paying on your behalf.

This product can be very helpful as there are often fewer area restrictions amd clients are typically not required to be based in a major urban centre.

 

The self employed specialized 20% down payment mortgage option:

This is one of the more flexible self employed mortgage options in Canada.  For qualification these specialized lenders follow a reasonability test for your income.  The test includes two components: determining if your industry tenure and income makes sense, and then reviewing your most recent one to three months of personal or business bank statements.  With these bank statements we will then add up your deposits to determine your annual income.

For example if you have deposits of $4000 for January, $7000 for February, and $6000 for March, a three month average of $5666 would give us an annual income for you of $68 000.  This is an advantage to our self employed clients as it uses your gross income and does not include any expenses or deductions.

The pricing for this product is usually about 1% above best rates
The 35% down payment mortgage option:

This option used to be quite prevalent with most lenders offering an equity based mortgage with best rates and terms at 65% loan to value.  With the government instituting the B-20 guidelines that required enhanced due diligence for lenders in terms of income verification requirements most lenders cancelled their program.

There are a couple of remaining lenders who have this program.

The pricing for this product is typically best rates and terms.

 

A couple of additional self employed speciality lending notes:

Some lenders will either reduce the loan to value or not provide financing on apartment condos with these programs.

Many of these programs have maximum loan amounts ranging from $600 000 to $750 000.  We are often successful in obtaining mortgage approval at higher amounts for our clients however lenders will often ask for additional business income confirmation to ensure there is a good lending fit.

We have some lenders who will not ask for confirmation of your personal taxes being paid up to date

 

If you are self employed and are interested in purchasing a new home or refinancing your current home it is very important that you work with a broker who has the knowledge, experience, and lender relationships to ensure your mortgage is structured and presented properly.  The structure and presentation can sometimes be the difference between being approved for your mortgage or being declined.