If you are self-employed you may have been able to easily obtain financing for your real estate purchases just over two years ago, but it’s likely a more difficult endeavor in the current credit-crunched lending environment.
There are essentially two types of Business-For-Self (BFS) clients – those who can prove their income and those who cannot and must instead use a stated-income mortgage product.
BFS clients who can prove their income must also show they have a business license and are up-to-date on their taxes.
Documents often required include: Notice of Assessments (NOAs) for the past two years showing taxes have been paid and are up to date; T1 generals or T4As; GST returns; and articles of incorporation.
If you have the above documents readily available you are much more likely to be approved for a mortgage if you qualify simply on your income – as long as your credit is strong.
The trouble is that those who cannot prove their income pose a higher risk in the eyes of lenders.
Canada Mortgage and Housing Corporation (CMHC) offers default mortgage insurance for BFS clients through a stated-income mortgage product up to 90% loan to value (LTV) – so the down payment can be as low as 10% of the purchase price – but the income has to make sense based on the occupation.
This is important, because the chances of finding lenders to fund this type of deal are significantly boosted if the mortgage is CMHC insured.
Lenders and insurers are well aware of the tax write-offs that self-employed borrowers can leverage, but these deals are accepted or declined based on average incomes for specific fields, as well as the borrower’s credit rating.
It pretty much goes without saying that those with credit blemishes will have a tough time obtaining mortgage financing if they’re self-employed.
While BFS mortgage financing is viewed on a case-by-case basis, if you work with a mortgage professional or banker to obtain a pre-approval, they can confirm that they have access to mortgage financing and find out exactly what they can spend on a home before they head out property shopping.
If you cannot obtain a pre-approval and/or mortgage insurance, the maximum LTV they are likely to qualify for is between 50% and 80% – which means they will need a much larger down payment.
If you do not qualify for traditional financing, you may be eligible for alternative – or private – funding.
Mortgage professionals often have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages.
Although your clients will pay a higher interest rate – on average about 8-12% – they will be thankful that you were able to point them towards another professional who could help them acquire funds to purchase a home.
It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk.
The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.
Jean-Guy Turcotte is an Accredited Mortgage Professional with DLC Regional Mortgage Group and can be reached for appointments at 403-343-1125, texted to 403-391-2552 or emailed to jturcotte@regionalmortgage.ca.
