With the number of people in Canada who are self-employed on the rise, home ownership can seem like a challenge. In today’s update, we review how lenders and insurers qualify these mortgage applicants.
In particular, we will discuss mortgages as they apply to sole proprietors, a very common form of business ownership particularly on the island. A sole proprietor is a person who runs a business that is not limited, has only one owner, and could have zero to several employees. This person may pay themselves through the business payroll system to take a steady wage, but all net income of the company would be taxable income for them. A sole proprietor may instead choose to draw income through the year based on cash flow and then calculate their total income at the end of the year.
Qualifying for a Standard Mortgage
For the purpose of obtaining a mortgage, a self-employed sole proprietor would need to earn enough income as reported on line 150 of their tax return to debt service all their debt along with the mortgage, heat and property taxes. To qualify for the mortgage, this person would need to provide:
- proof they have been in business for a minimum of 2 years;
- 2 years’ full income tax returns;
- their most recent notice of assessment to prove they don’t owe taxes to the Canada Revenue Agency.
In the case where all of the above are fulfilled, your mortgage planner is allowed to use a 2-year average income and can add 15% to account for the assumption that you would have written off a certain amount of expenses that would have otherwise been paid to you in wages.
The Alt A Program
What if your 2-year average income doesn’t allow you to qualify, even with the additional income? Your mortgage professional still has access to an insured product called the Business For Self or Alt A program. This program comes with a fee of anywhere from 0.90% to 5.45% added to the mortgage and based on loan to value - or how much you are borrowing compared to the value of your home. This fee is paid to the mortgage insurer to protect the bank should you default.
From the insurer is the following explanation of the Alt A program:
“This program is designed for self-employed borrowers who are unable to provide traditional income verification but have a proven 2-year history of managing their credit and finances responsibly. Eligible borrowers typically own a small size business for a minimum of two years, which can be confirmed via a third-party arm’s length document. In addition, the borrower is required to declare their annual income and annual business revenue, which should be reasonable based on the industry, length of operation and type of business.”
While the program may seem simple on the surface, there are many criteria that are examined by both the insurer and the lender before approving the mortgage. The most important distinction is whether the file qualifies with income from your T1 General forms. If it does, we can proceed with a non-stated or uninsured product as the income can be verified.
Qualifying with Stated Income
If the file does not qualify based on the T1 Generals, we move into a stated income position. This process may not always make sense. For example, a home care worker with an annual net income of $30,000 may not be able to state $50,000; however, a furniture maker who nets $30,000 on their T1 General may be able to state $50,000.
Factors to consider in stating income include:
- How much gross income was on your T1 General?
- Do you have employees?
- Is there a cash component to your business?
- What kind and how much in expenses do you write off in a year?
The stated income product, like most mortgage lending products today, has many nuances that can be complicated to navigate on your own. Working with a mortgage professional long before you require this product is highly important to ensure that you will qualify when you put in the offer to purchase your new home.
If you are self-employed and think you may buy or refinance your home in the next couple of years, contact Auxilium Mortgage to speak with one of our planners. Call Toll-Free 1-855-590-6520 or visit us at 307 Goldstream Avenue during regular business hours, Monday through Friday 8:30 a.m. - 5:00 p.m. We can also arrange an appointment evenings or weekends to work with you.
This article is written from the perspective of a mortgage professional and the rules that we must follow when qualifying self-employed/business for self individuals.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.