Are you considering becoming self-employed? You are not alone as Intuit Canada recently found out in their 2018 survey entitled “Vision 2020: Empowered and self-employed in Canada.” Based on their survey, they predict that 45% of Canada’s workforce will be self-employed by 2020! In a similar article from 2018, CBC found that people working for themselves account for 86% of Alberta’s net job growth since the recession ended. (I wasn’t aware that it had ended but maybe that is just me).
Lenders have paid attention to this and have developed new programs to help self-employed individuals obtain mortgages.
Back in 2005 to 2007, it was incredibly easy to get a mortgage if you worked for yourself. However, CMHC and Genworth experienced a large number of mortgage foreclosures starting in 2008 so they tightened up the qualifying rules. This has been the case for years but lenders are becoming more creative in how they determine a self-employed person’s income for qualifying purposes as follows:
1) Confirm Income – by taking a two-year average of Line 150 from client’s T1 general – under this program, lender takes a 2-year average and uses the result as income. Normal interest rates, insurance premiums and qualifying percentages apply.
2) Stated Income – lenders understand that the self-employed make more money than they might declare on their tax returns (by leaving the excess in their company). This program allows the client to state an income to be used for qualifying. Income stated must be reasonable for the industry the client works in. Under this program a 10% down payment is required and the insurance premium is higher. Normal interest rates apply.
3) Average corporate deposits – a number of lenders will ask for 3 months of corporate bank statements, add up the deposits and use this as income. With this program you will need a minimum of 20% down payment and interest rates are higher and most lenders will also charge a lender fee.
4) High qualifying ratios – lenders will take earnings from Line 150 for business for self-clients and increase it by 15%. They then use the result as confirmed income but qualify using very high ratios. Interest rates are higher, fees apply and a minimum of 20% down payment is required
5) Net Equity Analysis – here lenders review a company’s financial statements and determine how much a self-employed client could withdraw from their corporation. Based on this estimated withdrawal, the lender runs the numbers and determines how much the client would qualify for. Normal interest rates apply but the down payment requirements are much higher.
As a result of these programs, self-employed clients shouldn’t feel that they can never afford a house!
Please note that I have summarized these programs and if you would like to discuss them in further detail, please feel free to contact me!