October 2, 2015
Mortgage Financing for Self Employed People
A recent article in Canadian Mortgage Trends talks about one form of financing called "Stated Income". It's financing that's geared towards self employed individuals. As a self employed person you do get to take advantage of many write offs but this can ofter lower your income, or at least what shows on paper. The stated income program kind of circumvents this as we state your income, within reason, at what is needed to make the debt ratio numbers work. There are a few requirements; two of them being you need 10% minimum down payment and to prove you've been in business for at least 2 years.
The article below talks about one lender and it's pricing, which in my opinion is a bit high. At this time I can still get a rate of 2.69 to 3.09% with no set up fee for this type of financing.
Self-employment has been trending upwards in Canada in recent years. In its 2015 Spring Survey, CAAMP estimated that five per cent of home buyers worked for themselves.
And it's no wonder that the ranks of self-employed workers are growing. Apart from involuntary reasons like job dislocation, many choose self-employment for the lifestyle benefits, like making your own schedule, being able to work from home and deducting day-to-day expenses such as fuel, utilities, telecommunication and networking costs. That last point is a big one. It can be highly advantageous to earn, say, $100k per year, and then whittle it down with legitimate write-offs in order to achieve a much lower tax bracket.
The often-misconstrued disadvantage of being self-employed, however, is the challenge of getting a mortgage. After all, a key to borrowing is the ability to repay, which is linked to one's earnings, usually provable earnings.
Fortunately there are programs in place from various mortgage lenders that can accommodate the unique circumstances of the thousands of self-employed buyers.
Accessing these lenders usually requires one to venture outside the normal borrowing channels- those being banks or trust companies. Although banks and other 'A' lenders have their own self-employed lending programs and more favourable rates, borrowers often get bogged down with their paperwork requests, to the extent that many 'business for self' applicants cannot meet all of the lender's documentation requirements.
Fortunately, mortgage brokers have access to simple and easy alternatives provided by lesser-known private lenders. As one such lender, Magenta Capital Corp. offers a 'no-doc' program (well actually it's more of a 'low doc' program) that makes life less cumbersome for self-employed borrowers.
The program requires only that clients provide their most recent NOA (notice of assessment) to prove their taxes are up to date. Unlike most banks and institutional lenders, Magenta doesn't use the NOA to gauge income. It instead relies heavily on the property equity for its security, for which a standard appraisal is used to confirm the value.
At this point you may be thinking, ''This seems a little too easy. The catch must be incredibly high interest rates and fees.''
The reality is that rates can be as low as 4.99% with a 1.5% fee (which is added to the loan amount). And, provided your credit rating is over 575, you can access up to 75% of your home's value through this program. If your score is 650+, that goes up to 85%. Better yet, this can all be done with a 40-year amortization to keep your payments manageable until you can qualify for cheaper bank financing.
Lenders offering these sorts of low-document lending programs rely primarily on the borrower's previous repayment history and the property itself. That's important to keep in mind. It's also essential that the property is located in a high density area- i.e., a city or its various suburbs.
If you have a legitimate self-employed business, an urban property and no worse than minor credit blemishes, remember that flexible stated income programs still exist. They can help you get in a home much sooner, even if you can't prove income the traditional way.