(Dec 27, 2023)
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Qualifying for a mortgage is generally a cumbersome task, and for self-employed applicants, the process is even more challenging. It presents difficulties for both the mortgage broker and the client. The mortgage broker must possess an exceptional understanding of qualification guidelines from multiple lenders and the ability to apply them to the specific needs of the applicant. Simultaneously, the applicant must provide copious amounts of documents and details for a proper and complete adjudication.
From both perspectives, the adage ‘you get what you put into it’ holds true. The key documents requested include T1 Generals, Business Financials (if available), and Notice of Assessments. This is the stage where the expertise of the mortgage broker becomes crucial. The reality is that not all mortgage brokers (or bank representatives) understand how to read these complex financial statements, let alone dissect, interpret, and draw conclusions from them.
Most brokers or bank representatives typically look for the most recent two years’ worth of Notice of Assessments and calculate the qualifying income based on a 2-year average. This method works fine if the declared income is sufficient to qualify for the desired purchase. However, what if the declared income falls short of qualifying the applicant for their desired mortgage?
An inexperienced broker or banker might conclude that the applicant doesn’t earn enough income and generate an understated pre-approval mortgage qualification amount. But what if the self-employed applicant intentionally declares a lower income for personal income tax purposes? Alternatively, what if they declare their income via dividends rather than T4s? Or what if they only withdraw a specific amount of income from the business for living expenses, leaving the remainder within the business where they pay far less tax?
Being self-employed offers the advantage of leveraging powerful tax-saving strategies. Therefore, qualifying based solely on the two most recent years’ Notice of Assessments isn’t a one-size-fits-all method for all self-employed applicants. There’s more to it than meets the eye.
Here are some lesser-known qualification boosters that can propel self-employed applicants to higher mortgage qualification amounts:
- the Gross Up- while self-employed individuals might have a lower taxable income due to their deductions, their actual cash flow or ability to repay a mortgage may be higher. Grossing up provides a way to consider the true cash flow rather than just the reported taxable income. Participating lenders will allow self-employed applicants to gross up their declared income by as much as 30%.
- Net Income After Taxes (within the business financials)- using net income after taxes reflects the financial stability and viability of the business. It further acknowledges that the business is generating profits after covering all operating expenses, tax obligations and dividends already paid out to the owner(s). Some lenders will consider up to 60% of the Net Income After Taxes as qualification income.
- Stated Income- also known as “no-doc” or “low-doc” mortgages. Allows applicants to state their income without providing traditional income verification documentation such as tax returns and other self-employed financial documents (i.e. Business Financials). These mortgages often place a heavier emphasis on the borrower’s creditworthiness and credit score and offer additional assurance to the lender as they are typically backed by creditor default insurance in the event the borrower defaults on mortgage payments. This creditor insurance premium ranges from 3.30% to 5.85% and is multiplied against the mortgage principle, ultimately having an immediate impact on the property equity as its capitalized into the loan. For example, the premium on a 90% loan-to-value mortgage for a $500,000 purchase would be $26,325 (5.85% premium multiplied by the mortgage principle of $450,000). Click Here to be redirected to the Business For Self Guidelines and Premium Rate table of one of Canada’s leading mortgage default insurance providers.
- Most Recent 12-Months Bank Statements- this is typically the qualification method used by sub-prime lenders where applicants have been turned down by traditional “AAA” mortgage providers such as household name big-bank brands. Allowing applicants to use the most recent 12-month bank statements also circumvents the requirement to verify that all personal taxes are up-to-date and paid in full. This qualification methodology often yields the highest interest rates as well as a 1-2% fee that is deducted from the advance (proportionately increasing the cash-to-close as a result).
It is important to note that the specific rules and guidelines for the above self-employed qualification boosters can vary among lenders and mortgage programs. The ability to take advantage of any of the above ultimately depends on the analysis of tax returns, income statements, balance sheets and other financial statements. Additionally, credit scores, property characteristics, and loan-to-value ratios also play a role.
Are you self-employed and looking to maximize your mortgage qualification? Call or text Marko Gelo right now at 604-800-9593, or Click Here to schedule a free, no-obligation phone call with Marko. You can also call Marko on WhatsApp.
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Contact Marko, he’s a Mortgage Broker!
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Email: gelo.m@mortgagecentre.com
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