If you are self-employed, be prepare to jump through a few more hoops when applying for a mortgage!
If you are about to apply for a mortgage and you’re self-employed, be prepared for discrimination. If you don’t have a steady employer’s salary, getting financing won’t be as easy as it used to be.
According to the big boys, it’s going to take more paperwork, documentation and more justification to get approved.
Since 2008, the government has lowered the maximum amortization period from 40 to 25 years, and reduced the maximum gross and total debt service ratios to 39% and 44% respectively. Then, last October, the Office of the Superintendent of Financial Institutions’ B-20 rules put the underwriting practices of federally regulated financial institutions under scrutiny.
These changes have made for a more rigorous review for the self-employed borrower to a greater extent than salaried borrowers. Not fair! The self-employed, the back bone of the Canadian economy are being penalized again.
The self-employed person may make more money than a salaried individual, yet because of the method of the reporting of income and expenses, taxable income may be lower than a salaried individual, thereby putting the self-employed at a disadvantage when borrowing money.
I was told, off the record by an accountant at one time, to beat the system and I am not suggesting anyone do this, to report minimal expenses for three years in a row, there-by substantially increasing my income putting me in a higher tax bracket. Then upon receipt of financing, request an audit, submit the expenses presumably overlooked previously and receive an adjustment and huge rebate.
It is becoming increasingly more difficult for the self-employed to deal with top-tier banks, forcing some to alternative lenders, some of which are not federally regulated, who may take a less rigid approach when assessing self-employed applicants. However, the trade-off is often higher interest rate.
If you have a real estate need and are either self employed or salaried, please give me a call for a free consultation.