Mortgages For The Self-Employed

Mortgage products are not one-size-fits-all. As a Mortgage Planner I strive to think outside the box in order to find my clients the best products to suit their needs. Unlike the banks who require the borrower to fit into their own narrow lending guidelines, I determine what my client’s goals are and fit those into the best product for my client.

One area where this is often the case is with self-employed borrowers. Today, approximately 1 in 5 Canadians are self-employed, and with the current economy the numbers are increasing. In June alone the number of self employed workers rose by 37,000.

To address this growing market, mortgage lenders are offering more products for the self-employed borrower. Traditionally the biggest problem with qualifying for a bank mortgage is that income is more difficult to prove for someone who is self-employed.

With self-employed borrowers, there are generally two different product stems that are available; proven income and stated income.

Proven income products utilize the individual’s income that was reported to Revenue Canada. The most common method of determining income is for the lender to determine the average of line 150 from the borrower’s three most recent years’ tax returns.

Here is one example of what this would look like.

First, the income is calculated by adding up the previous 3 years NOA’s (Notice Of Assessment) and averaging them.

2006 Income $50,000
2007 Income $75,000
+2008 Income $100,000

Total $225,000 divided by 3 = $75,000 average income used to qualify.

That is the basic income qualification for self employed programs, although there are exceptions. If applicants can demonstrate income increases year after year for four years then they may accept the most recent year’s income amount.

With proven income mortgages many lenders will perform what is called an “income gross up”, whereas they will add 15% to the average income to account for deductible expenses of the borrower.

This means that if $75,000 is used as the amount of income earned it is then multiplied by 15% to increase the actual amount to $86,250.

It is important to note that not all lenders will allow the “income gross up” or “add backs” with their products and it is highly dependent on the borrower’s net worth and credit score. For those who can utilize this however, it is a great benefit.

The other option for self-employed borrowers is the stated income mortgage. Basically, the stated income programs allow a borrower to qualify for the loan on the income they say they make, rather than what their tax return says. This product is ideal for borrowers who may not qualify based on the averaging method of the proven income method or just for those who do not want to provide income verification.

With this product most lenders will require at least two years of self-employment and strong credit ratings.

As the percentage of self-employed borrowers applying for mortgages increases so will the need for mortgage products to service these needs. A mortgage planner is able to ascertain which self-employed product, with which lender, will best meet your goals and needs. If you have any questions about mortgages for the self-employed or any other mortgage concerns feel free to contact me.

John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
Cell: (905) 320-2247
Fax: (866) 442-6710
Bus: (289) 337-9718
Email: John.Shearer@verico.ca