Unlocking Mortgage Solutions for the Self-Employed

In this episode of Real Life Mortgage Solutions, Len Lane discusses his process for obtaining mortgages for self-employed Canadians. Len provides invaluable insights into recent shifts in tax regulations impacting self-employed mortgage applicants, emphasizing the importance of strategic tax planning. He discusses the challenges self-employed individuals face in qualifying for mortgages due to tightened regulations by CMHC and OSFI, highlighting alternative lending options and specialized programs tailored for entrepreneurs.

Len outlines the documentation requirements for self-employed mortgage applicants, emphasizing the Rule of Two and the significance of financial statements, business licenses, and articles of incorporation. Through comprehensive advice and real-world examples, Len navigates the complex landscape of self-employed mortgages, offering actionable strategies for securing financing tailored to individual needs.

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Len 00:02

Welcome. My name is Len Lane and I am the founder and president of Brokers for Life Inc, and we are Dominion Lending Centres in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions.

Len 00:20

Navigating the ever-evolving landscape of self-employed mortgages in Canada presents unique challenges and opportunities for entrepreneurs. Blog Posts synthesize insight from several documents, offering a comprehensive overview tailored for self-employed individuals seeking mortgage financing. Recent shifts in tax regulations have introduced new considerations for self-employed. A notable change involves the taxation of personal and corporate incomes, where it may be more tax-efficient to T4 yourself, rather than taking out dividends. However, this strategy could limit one’s mortgage qualifications potential, since most lenders read predominantly considered T4 income, but we have lenders who will actually gross that up 15% just as they do dividends. Historically, self-employed mortgages were more accessible, the banks allowed self-declared income and focused on business cash flow. However, tighter regulations by CMHC and the OSFI, the Office of the Superintendent and Financial Institutions, have made it increasingly difficult for self-employed individuals to qualify for additional mortgages. Now, applicants must either demonstrate higher taxable income, or explore financing from private lenders, who may offer more flexible criteria, as the cost of higher, of course is higher for down payment, and interest rates will be higher as well. They made it either that you paid more personal tax, or you paid a higher mortgage rate, something that probably not that fair in the system when self-employed is something that more and more people are seeking to do every day. Part of that became produced a program called Business for Self less than two years, it was aimed at people who have worked for someone else for many years, perhaps then decided to branch out on their own. What they will allow us to do is look at what you made that last year that you were working for someone else, and take a look at your financial, your cash flow for your business to kind of combine the two and come up with a reasonable amount of income that we can use to help you qualify for a down payment. MCAP has a very good program for this and what they emphasized in it is what they call bookends, what did you make before? What are you making now and let’s meet somewhere in the middle with a reasonable amount that we’ll be able to use, not only with CMHC, but to qualify for your mortgage as well.

Len 02:56

Qualifying for a mortgage as a self-employed individual involves a lot of documentation. We call it the Rule of Two, two years of NOAs, two years of T1 General’s, two years of financials, and if we’re using our other program, we actually have one where they want to see 12 months of bank statements from the company so that we can kind of extrapolate the income that is going through the company itself. Sole proprietors are different again. Sole proprietors automatically get a gross-up of 15% and can add that back in into your income. So, it makes quite a difference, if you’re one of the other. Alternative lending income programs provide avenues for those who might not traditionally meet the criteria. These programs offer often rely on bank statements and other financial documents to assess income and may require higher down payments. Despite the potential for higher costs, they represent valuable options for self-employed individuals, without robust business cash flow at the time, but less conventional income documents. The path to securing a mortgage for self-employed has become more complex due to regulatory changes obviously. However, understanding the available mortgage products alongside strategic tax planning and income documentation can open up financing opportunities. Whether through traditional banks, private lenders or programs tailored to new business owners, the key lies in navigating those options with informed precision. For the best outcome working with mortgage professionals obviously, who specialize in self-employed clients can provide tailored advice and access to suitable financing solutions. If you’re on our brokersforlife.ca/associatespage, we actually highlight those that I have experienced with self-employed or you will see it will say all types of mortgages.

Len 05:00

So, documentation, let’s really talk about documentation because it is the key to making this work for just about anyone that is in that industry. Big banks definitely have problems with financial statements at the moment, they want to see a consistent long-term income. If you’ve T4 yourself out of the company, that’s great. Like I said, we have lenders that will gross that up for you by 15%. Taking nothing from the company in any shape or form is not good. They will look at bank statements, like we said for 12 months. If you’re incorporated, you probably have a business license. Articles of Incorporation or a GST number for at least two years are pivotal to the legality and operational status of the business. These documents serve to establish the business’s credibility and long-term viability. Some of you may have small businesses on the side that have you been doing for quite a few years and have maybe set that money aside. Or maybe not, we have had occasions where smaller businesses under 30,000 a year, you are not required to be GST registered. And so whether we have letters from clients of the work that you did, reference letters, perhaps something along that lines, can help us maybe to use some of that income, especially if you’ve declared it on your taxes. Flexible approach to business, BFS income verification, it is there but it again requires all that paperwork, we need to see that 12 months of bank statements, we can extrapolate from that, but we’re overhead and what were cost, and always able to and willing to take some time and do that, it’s about a two-hour process usually to go through it all for 12 months. But we can definitely assist you with that. So, thanks for your time brokersforlife.ca…