My parents were self employed, my grand parents were self employed and aunts and uncles were self employed. I come from a very entreprenuriel family that fully support and tout the entreprenurial way. Growing up I saw this and was raise to believe that it is the best way to succeed in life. I'm very grateful that my parents taught me this as I've been self-employed my whole working life (out of school that is). I've experienced first hand the benefits and frustrations of being self-employed. On one hand you get the benefits of making your own hours, taking vacations whenever you want and not having to answer to a boss. One the other hand you have the frustrations of making your own hours, taking vacations and not having to answer to yourself! On top of that there is the added frustration of trying to get financing for things.
Fortunately some banks and lenders are realizing that self-employed borrowers provide a greater chance for success and stability. As a result there are different programs that are available for self-employed borrowers. One such program is the ability to gross up your income, another is to add back certain expenses and the other is a stated income or equity program.
Being self-employed for the last 18 years has allowed me to really understand the in's and out's -- do's an don't of borrowing money. I would call myself an expert in the field of getting mortgages for self-employed people because of my extensive experience both professionally and personally. Below are the differnent programs broken down including what is required for each one.
On your CRA Notice of Assessment for the most recent year the top line is usually Line 150. This shows your gross taxable income for the previous year (after expenses but before taxes). One option we have is to gross this number up and use the higher number. Some of the banks and lenders will allow this because they know that self-employed individuals are able to write down their income and as such their gross income tends to be higher than what is reported on Line 150. The benefit to using this method is that there is no added CMHC/Genworth premiums.
With some lenders they will allow us to review your tax returns along with the corresponding CRA Notice of Assessment. When reviewing the tax returns, I'm able to extract certain expenses and add them back to your Line 150 instead of doing the gross up. In most cases, using add-backs will result in a higher income than just the grossing up line 150. The benefit to this method is that the resulting income is usually higher than grossing up and there are still no added CMHC/Genworth premiums.
The last method that is available is self-declaring your income. This is just as it sounds, you state the gross income that you have earned. Keep in mind that although you can state your gross income (before all your deductions), this does not give you permission to fraudulently submit a fake income to the lender. The intention of this program is to provide a method for people to use an income that wouldn't normally be acceptable by a lender. There is a reasonability test for the income being used. By this, I mean that your income declared must be within reason to that of someone else in the same profession. While it is possible for a plumber to make $300,000 per year, it is not the norm. Therefore the lenders might not allow you to use that much income to qualify for.
The advantage to this method is that you are able to use income to qualify for a mortgage that you wouldn't normally be allowed to use. The disadvantage is that if the mortgage is high ratio (above 75% of the house value or purchase price) then the CMHC/Genworth premiums are slightly higher.
Both the gross up method and the add-backs method of calculating income are considered normal. This means that the borrower would be allowed to qualify for all of the programs offered by the bank and/or CMHC/Genworth (ie. purchasing a home, purchase plus improvements, rental properties, mobile homes and no money down).
When a borrower applies under the stated income or self-declared income program with a lender, the down payment requirement slightly increases. You need to have a minimum of 10% down with this program. With 10% down payment you are able to apply for the stated income program for your mortgage, however the more the down payment the more the options you will have available to you.
When you let me handle your next mortgage, I'm going to help you find the cheapest, most affordable and effective way for you to get approved for mortgage financing as a self employed borrower. I know the programs inside and out and I recommend that you provide me all of your income documents up front so that I can find the best program for you and your family. The more documents you give me up front the more options I can figure out for you.
Call today toll free at 1-866-257-0158 and allow me to handle your next mortgage.