Hugo Dos Reis
If you’re self-employed like us, you’ve likely experienced how difficult it can be to obtain financing from a lender. With 15% of the Canadian population being self-employed, the reality is that most of these individuals show much less income on their tax return than they actually earn. While this allows significant tax savings, it will work against you when obtaining mortgage financing. As a general rule most lenders will only take the last two-years of net income, (not gross) and use this as a benchmark to determine the mortgage you qualify for.
For example; if you made $100,000 in 2018 and $90,000 in 2017 but are only showing a net income of $30,000 and $20,000 respectively. Lenders will use the average two year net income of $25,000. With the new stress test rules implemented back in January 2018, this only allows you to qualify for a mortgage of approximately $100,000.
The good news is that mortgage default insurers like CMHC have revamped their self-employed programs to make it easier to qualify. Traditionally, consumers associate mortgage default insurers (CMHC, Genworth and Canada Guaranty) with first-time buyers and programs allowing buyers to put less than 20% down.
In a nutshell, this updated insurer program takes a more reasonable and common-sense approach to lending. Instead of relying only on tax returns to establish income, lenders and insurers will consider all revenue sources, savings, credit bureau, field of industry and so on.
For example; IT professionals who previously earned a $100,000 annual salary at a large company but have since incorporated and now work for themselves. Under new corporate structure they will likely show much less net income on their tax returns ($35,000), even though their actual revenues are higher ($150,000). We can now establish the client’s actual income through contracts with their clients and business partners, using invoices and business deposits to help them qualify for a mortgage.
By taking a more common-sense approach to lending, especially for self-employed clients, these new programs will ensure that more people are home owners and not stuck in a renting cycle because of very aggressive and conservative lending policies.