During the last few weeks, I’ve been working on mortgages for two self-employed people.
Neither application was cut and dried. Documentation made all the difference for both files.
The first client (let’s call him Zach) was a realtor. He bought a home with a rental suite earlier this year as he and his wife were separating. Six months later he was back and wanting to buy the townhome he had previously been living in with his ex-wife as per their separation agreement.
His income is strong and the numbers work well with the home he bought in June rented out. The application qualified with room to spare under the new stress test rules.
He was moving back into the townhome.
The first two lenders I approached were not interested in the application despite the overall strength of the file. They couldn’t wrap their heads around why he would want to downgrade (their perception) back to the townhome after purchasing a nicer home.
In this particular case, he had done extensive renovations to the townhome and loved the location. It had been home for many years and he wanted to stay. It worked well for his business and he wanted to stay near the downtown core.
Why would lenders be concerned?
In this case, they felt that he was trying to buy the unit as a rental and circumvent the requirement for 20 per cent down payment. They had a tough time believing that he would indeed be moving back in to the townhome.
Their other concern was the length of time he had been self-employed. Zach was coming to the end of his third year as a realtor. This meant that he had two tax returns with business for self income, but the first year was very low.
With self-employed clients, one of the ways we determine income is to average reported income from the previous two years. In Zach’s case I was able to find a lender that also considered his year to date income, even though he won’t be filing his return until the new year.
Zach was able to provide a copy of the strata regulations which confirmed that rentals are prohibited in the complex. With this information in hand, we were able to find a lender that provided the mortgage product he was looking for.
The second file was a little more complicated.
Grant is in his mid-20s and is a self-employed painter. He has been working as a painter since he was 19 and is a very careful saver. He had almost $30,000 saved for his down payment.
The twist for him is that he decided to start his own business at the beginning of 2018.
When I initially took his application, I told Grant that we might not be able to find a lender that would support the file in his name alone due to his limited time in business.
We ended up adding Grant’s father to his application, with the intent of removing him in two or three years once Grant has established a track record of business income.
Both of these clients were a little frustrated with how much documentation their lenders required to approve their mortgage applications.
I’m not sure of the actual figures, but I have heard that the number of new businesses that fail within the first three years is significant. I believe I heard it is somewhere in the neighbourhood of 75-80 per cent.
As an example, I heard at a seminar that the attrition rate for new mortgage brokers and realtors is 85 per cent by the two-year mark.
Lenders do not want to foreclose on homes. They want to collect interest on the mortgage funds they lend out.
For newly self-employed borrowers, most lenders will be looking for either a larger down payment or a co-borrower to add strength. This is not a reflection on you as a borrower, but based on historical trends. They want to make sure you will be able to make your mortgage payment for years to come.
I was able to find A lenders for both of these clients.
There are lenders in the B world that offer specialty mortgages for self-employed clients that don’t qualify based on their reported income but have strong business income, significant down payments, and squeaky-clean credit.
Some people stay in the same line of work but choose to go the self-employed route to allow for more flexibility and balance on the personal side.
There are several important take-aways here if you are wanting to buy a home and are newly self-employed.
First, be meticulous with your paperwork. Make sure your taxes are filed and paid. If your business has a cash element to it, deposit the cash to your bank account. Some people may not in an effort to keep their taxes low, but the down side for mortgage purposes is that lenders aren’t able to see your true income.
Second, be open to options. Adding a co-borrower may not be the route you prefer to go but may be what you need to be able to buy a home now rather than waiting until you have a few years of reported business income under your belt.
Maybe considering a B lender who is more open to self-employed individuals is the right fit.
Most importantly, is the timing right? If your business is not well-established, would it be wiser to wait a little longer before buying a home? Each situation is different, so this a question only you can answer.
published on Castanet December 10, 2018