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Self Employed Mortgages
There are two different types of mortgages for self-employed borrowers. One is based on qualified income (proof of income on using tax returns) and the other is non-qualifier income (using bank deposits rather than tax returns). There are big differences in lender policy based on each type of borrowers.
Borrowers who qualify based on provable income:
Once you are self-employed the mortgage broker or lender will ask to see your last two years personal T1 Generals and Notice of Assessment Income Tax Return. If Incorporated two years financial statements too. The two year average of the personal tax returns is then used to determine your borrowing power. If the income is enough to support the mortgage you need, then you as a borrower, can put down as little as 5% for a purchase, refinance up to 80% of your property value, purchase rental properties, and even access secured lines of credit. You are treated just like a borrower on salary or hourly income. Documents required are:
- Proof of self-employment for at least two years such as business license, Articles of Incorporation.
- 2 years personal tax returns to confirm income and no taxes owning and if incorporated two year financial statements too. If taxes are owing, they need to be paid before the mortgage closes.
Borrowers who qualify based on non Tax Retrun income:
One challenge that can pop up with self-employed borrowers is their personal net tax return income is not high to carry the cost of their mortgage they require. Self Employed borrowers get to write off their expenses against income however, as a result, their net income is reduced below the actual real income/gross income. These borrowers can fit into what we call, the Self Employed Stated Income Program or. A borrower can state their income rather than have to prove it on paper. The Income stated has to be reasonable based on the type of employment. Usually 90K is the cut off therefore, borrowers needing to state more will need to show financial statements or borrow from a more high risk lender.
If the income is reasonable and the lender accepts the income, other documents required would be:
- Proof of self-employment as per above and last year Notice of Assessment to show no taxes owning. If taxes are owning they need to be paid.
- Minimum of 10% down to purchase a property
- Can refinance up to 80% as well but mortgage needs to be insured. To avoid insurance, the loan to value has to be 65% or less.
- It is rather difficult to purchase a non-owner occupied investment property under the Stated Income Program. The borrower would need to borrow through a higher risk lender. Secured lines of credit are not available unless through a higher risk lender.
In today’s market we are finding that more and more self-employed clients who are not showing enough income on their NOA’s to support their mortgage need to go through an ALT- A lender. Typically it means a minimum of 20 % down payment and rates are about 0.50% to 1% higher with an additional 1% fee. It is not the end of the world, in a market where mortgage rates are still very low paying in the 3% range for your mortgage is cheap. As a rule of thumb we stick to a 12 month term if we place clients with an ALT-A lender giving them the opportunity to switch over to the A side upon renewal. The client is able to qualify with an A lender at the end of the 12 month term if their NOA income has increased, the mortgage rules have lightened up or a combination of both.
Contact Robert Clancy today to find out how to take full advantage of this program:
Robert Clancy, AMP,
SAFEBRIDGE Financial Group
Tel: 416 899-1467
Fax: 1866 385-4049
Thinking of refinancing: Mortgage yields have been fallen and as result fixed rates are coming down. In the US the Federal Reserve are expecting the lending rate (In Canada we call it the prime rate which is attached to variable rate mortgages) is expected to fall by .75% by 2020. If Canada fallow suit which they most likely will that brings our prime rate back to 3.20%. Time to start looking at mortgage switches or refinance to capitalise on these current lower fixed rates and future lower variable rates.