Mortgages for self-employed

It's not as easy as it once was for the self-employed to obtain mortgage financing.

A few years ago, you could tell your banker how much you made, look them in the eye and then promise you would make your payments.

As long as you had a great credit rating, that was good enough then, but not any longer.

Now, you have to provide a whole lot of paperwork and prove that you have the ability to make your payments.

My best advice for someone who is self-employed and looking to obtain a mortgage whether it is to purchase a property for the first time or moving up, refinancing a mortgage or looking to purchase an investment property –be prepared.

Here are a few pointers that could make the process go smoother:

  • Start early. Meet with your mortgage broker well in advance to discuss what is required to obtain a pre-approval for your financing.
  • Ensure that all your taxes are filed and that you don’t owe anything to the CRA. You will need your last two years Notice of Assessments from the CRA at a minimum.
  • The larger the down payment, the better. Lenders want to see that you have upfront equity. You must have a minimum of five per cent of your own funds and a minimum 10 per cent down payment.
  • Have on hand your GST return, business license (if you don’t have one, get one!) and the Articles of Incorporation for your company.
  • You will need your last two to three years T1 Generals that must be prepared by an accountant.
  • Declare a reasonable income for your profession on your tax return. You might suggest to your accountant that they have a conversation with your mortgage broker if you are considering mortgage financing.

You will want to pass along this note to your accountant – the creative accounting methods used to reduce the amount of personal income tax that you pay is now hindering your ability to obtain mortgage financing. 

If the income you report on your tax return is low, then you are going to have to work harder to justify to a lender that you have the ability to qualify for a mortgage.

An example of that is dividend income. It might be a great idea for tax purposes, but it’s a bad idea if you will be requiring mortgage financing. Most lenders consider dividend income as a one-off bonus and will reduce your qualifying income by that amount.

If there is a history of dividend income we may be able to request an exception from the lender, but I wouldn’t count on it.

There has been general tightening with all lending guidelines and also some extreme changes. Because of all the changes, it is that much more important that you work with an experienced mortgage broker.

You may have to work a little harder and provide more documentation but there are still many options available to the self-employed, so please give me a call 888-561-2679 to ensure that you are in the very best position when it comes time to arrange your mortgage financing.


Seller's market & mortgages

Stats from the Okanagan Mainline Real Estate Board confirm that there is low inventory for those who are hoping to buy a home.

This will create more competition for the available properties and potentially multiple offer situations with homes selling for higher than the asking price.

If you are in the market for a home right now or are considering a purchase this spring, here is my tip to increase the odds of you being the successful bidder in a possible multiple offer situation.

If you take these steps you might avoid some of the craziness that could happen this spring market.

This is my best tip and easiest tip:

  • Get pre-approved for your mortgage financing. Not pre-qualified, but a full pre-approval.

Before looking for a home or placing an offer, work with your mortgage broker to complete a full mortgage pre-approval.

This will include collecting all supporting documentation that a lender will require to provide a final approval for your financing. We will advise you of your purchasing budget, review any potential challenges and ensure you are set to go other than finding a suitable property.

We can also review the types of properties you are interested in and advise whether there might be any potential financing challenges because of property issues.

If you do all the work upfront, it could prevent your offer from falling apart because you were not able to secure financing for your purchase or possibly losing the property by needing to request an extension to finalize your financing which the seller may not be prepared to offer because there are backup offers on the property.

Being a pre-approved buyer could also place you in a more favourable position in a multiple offer situation.

But a word of caution — do not be tempted to place a subject-free offer. Subject to satisfactory financing is a key clause that needs to be included in every offer. You could be the most well qualified purchaser in history.

Stellar credit, great income and job stability with a significant down payment, but in the end, a lender could still decline your request for financing.

Here’s why. Mortgage-financing approval not only includes the lender being happy with your qualifications, but they must also approve the property. Essentially, it’s a two-step process.

My best advice to you would be to never place a subject-free offer regardless of what others are recommending and to think long and hard about it unless you have the cash in the bank to cover your purchase in the event that you can’t secure satisfactory financing.

Or have a detailed conversation with your mortgage broker well in advance to place a subject-free offer. There are some strategies to minimize your risk but an individual conversation would be required.

In a seller’s market, you need to be prepared to successful, so please give me a call to review your options at 888-561-2679 or email [email protected],

Kill your mortgage approval

We have worked hard together to get your mortgage approved and have been successful in securing great rates and terms for your mortgage financing.

There is going to be a period of time between receiving the final approval for your mortgage and the date that it will actually fund with the lender.

Things can go wrong within this timeframe, so here is a brief list of things to NEVER do between the approval and the final closing of your mortgage as most lenders are going to re-verify information before they fund your mortgage.

If anything has changed, it could kill your mortgage approval.

Change your job – Quit your job – Become self-employed

Do not change your employment status even if you are moving to a job that pays you more than you are currently making.

Most employers have a probationary period that you must complete and the lender may no longer feel comfortable with granting you a mortgage because you are making a change in your employment status.

Quitting your job might seem like an obvious thing not to do, but losing the income might also disqualify you for the financing even if you are not the primary borrower.

Make a change to self-employment – wait until after your mortgage closes. The mortgage rules for the self-employed are different than if you are an employee.

Buy a new car. truck, van, motorhome or new furniture

Most lenders are going to pull a new credit report right before they fund your mortgage.

If they discover credit inquiries from car dealerships or a new car loan or any new debt now reporting on your credit report, the new payment could put your qualifying budget ratios out of line making it so you no longer qualify for the mortgage.

It might also be tempting to go shopping for furniture and dishes for your new home, but you should wait until after you move into your new home.

By increasing the amount that you owe to your creditors you are jeopardizing your mortgage approval because you didn’t owe those funds when your mortgage request was reviewed by the lender.

Another side effect of applying for new credit – it could pull down your credit score to a lower number that means you no longer qualify for your mortgage as there are minimum credit score requirements.

Don’t use those credit cards or close any accounts

As above, lenders are going to update your credit report before they fund your mortgage. Significantly increasing the balances outstanding on your credit cards could disqualify you for your mortgage financing.

The lender has also approved your mortgage based on your current financial situation. There are minimum requirements for open accounts by both lenders and mortgage insurers so conversely by closing accounts you may no longer meet those minimum requirements for open credit accounts.

Do not co-sign for someone else’s mortgage or loan

If a family member asks you to assist them by co-signing or being a guarantor on a mortgage or a loan please don’t.

You may have the best intentions to assist a family member but this could also jeopardize your approval. Adding any extra debt could throw your borrowing ratios out of line as the new payments must be included in your debts even if you aren’t the one who is making the payments.

Don’t stop paying your bills

We may have approved you for a refinance of your mortgage to payout your debts but you need to continue making your payments until the mortgage has funded and the balances owing have been paid off.

Your credit score may be affected by not paying those bills and that could result in you no longer qualifying for the refinance.

The best course of action is to check with whomever approved your mortgage financing before making any changes to your financial situation. Making changes without the proper advice could actually cause your mortgage financing to be declined.

Unfortunately these examples are from real-life situations. Give me a call at 888-561-2679 or email [email protected] and I will be happy to ensure that you don’t do anything to jeopardize your mortgage approval.


Consolidate your debt

If you're carrying high interest credit card debt, car loans or other personal loans, you know it can be challenging to pay off everything that you owe.

If you are a homeowner and there is sufficient equity in your property, consolidating all your debt and including it in your mortgage payment might be the right solution for you.

There are many benefits to debt consolidation including the following:

  • A much lower monthly interest rate for all of your debts
  • Lower monthly payments
  • The comfort and convenience of making only one monthly payment instead of making multiple payments on your credit cards and other loans
  • Improving your credit score by reducing the amount you owe and now being able to make all of your payments on time

A debt-consolidation mortgage is not a quick fix and a full financial review should be completed with your mortgage broker. There could be costs to break your current mortgage to include those higher interest debts with your mortgage payment.

You may be lowering your current monthly payments, but now the debt is going to be repaid over a longer period of time. Is that really going to be financially beneficial?

It all comes down to the math, as the overall cost of borrowing could be higher or lower than what you are currently paying. Crunching all the numbers is the only way to know for sure.

There is also another real danger to consider. Are you disciplined enough to stick to a budget and live within your current income or will you be tempted to use those credit cards again and end up in exactly the same situation in the near future?

It can become a vicious circle unless you learn to live within your budget. You don’t want to end up in the same place a year from now.

On the other hand, if you are disciplined and can live within a budget, the benefits of the increased monthly cash flow could significantly improve your financial situation. These extra funds might be used for investing in your retirement with RRSP contributions and having an emergency financial fund in place for life’s surprises.

There are several possible options to consider for a debt-consolidation mortgage, including breaking your current mortgage to include the debt owed, a second mortgage for the consolidation or a home equity line of credit.

Now, all that’s left is to figure out precisely which solution is best for you to wipe out all those high interest payments.

If you would like a review, please give me a call.

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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