Mortgages for the Self Employed or Business Owners
Qualifying for a mortgage can be extremely challenging as a business owner.
New qualifying standards imposed by CMHC and the Finance Minister have presented a few more hurdles when it comes to qualification.
Here are the Top 3(ish) things to plan for as an entrepreneur when shopping for a mortgage, whether a sole proprietor or Incorporated business owner.
1) Write-offs can end up writing you off. Its no big secret that some of the glory of running your own business is being able to “write off” some expenses. Be cautious with your business planning and financial planning when mapping out the year(s) ahead. The key word here is “Plan”. Often, we see sole proprietors making a great “Gross Income”, to only see the net taxable earnings filed at a very low amount. It’s a great feeling to know that you may only owe CRA a small amount of taxes at year end, however we are now seeing lenders requiring a 2 year average based on your Line 150 amount. So applying for a Mortgage and declaring $100,000 as your income may be true to gross earnings, but to earn yourself a competitive rate means to qualify on Line 150, not gross income.
2) “What’s the price if I pay you CASH?” Being self employed, you often have the liberty of pricing out your own services. One must stay competitive on price, but also provide exceptional value as well. If you’re in a business where you are able to accept cash for your services, you need to be cautious with how you are claiming that income. If your cash income is not being…ahem…declared to CRA….you’ll need to at least show proof of this income if you want to qualify for an alternative lender mortgage. Once cash is in hand, be sure to make that deposit and keep records of it. Some lenders will allow you to provide business bank statements to show deposits accumulating over 3-6 months time. Remember, you’re asking a lender to fork over $500,000 for your financing of a house, the least you can do is show them you’re earning what you say you’re earning.
3) File Your Taxes On Time. On Time. Regardless of who is providing your financing, whether Big Bank or Broker Lender, they will all want to see proof that your taxes are filed and up to date. A 2 year history is status quo, some will request 3 years. The 2 biggest risks for a lender who is lending on a self employed client are inconsistent income over the previous years, and the risk of CRA placing a lien on the property due to outstanding tax arrears. As a business owner doesn’t have taxes deducted at the source (like when taken from an employer’s payroll), you could end up owing tens of thousands of dollars if not filed on time or properly planned for.
If you don’t qualify with a “traditional” lender, here are some expected fees you will have to pay. Generally, your interest rate will be higher and for a shorter term. A 1% lender fee will be required by the lender. So a $500,000 mortgage will see a $5,000 lender fee. Broker fees will likely apply, but those can differ depending on what the Broker will charge. Expect at least a $2500 fee to start depending on size and complexity of the file, and appraisal fees ($300-$500) as well.
Bottom line, planning for your future will only benefit you regarding financing. If you want a longer term and competitive rates with zero fees, expect to pay the piper. You’ll have to start claiming more income on Line 150 and pay those taxes, respectively. If you’re okay with shorter terms and higher rates and fees, writing off those expenses will still be a good plan for now. Always consult with a Chartered Professional Accountant, Certified Financial Planner, and a Licenced Mortgage Broker before making any major decisions.