• Self-employed and seeking a mortgage?

    If you are like many self-employed or commissioned individuals, you may be caught in a difficult situation; how can you reduce your income and, in turn, your tax bill, while still being able to qualify for a mortgage?

    To find a solution to this dilemma, you can make use of a ‘stated income’ program, in which you provide a reasonable figure for lending purposes, without having to provide verification based upon tax returns.

    The only requirements under this program are: that you have an above average credit rating, and proof that you have been in business, or at least, in the same industry, for 2 years or more.

    If this sounds too good to be true, well, that’s because it is.

    The downside is that the CMHC premium applied to this kind of mortgage qualification is close to double the regular premium. Now, while this is added to your mortgage, and might seem acceptable to you at the time, it’s nevertheless a cost added to the purchase of your property, and can result in tens of thousands of extra dollars in interest over the life of your mortgage.

    In an effort to avoid this, it’s important that your mortgage planner or lender try to fully qualify your income under regular guidelines.

    To do this, the bank or lender will take a 2-year average of your net income on your tax returns. If that’s not enough, there are other methods available before going straight to a stated income program.

    First, many banks will allow a 15% ‘gross-up’ of this 2-year average, in order to reflect a more realistic picture of income if you are self-employed, but aggressively using expenses to pay less tax.

    Under the new CMHC guidelines, implemented April 19th, if your income has increased for 3 consecutive years, they will now allow the banks and lenders to use the most recent, highest year, and gross that up by 15%, instead of a 2 year average.

    If this does not provide enough income to qualify, many banks and lenders will allow add-backs to income. The top three expenses on a tax return that can be ‘added back’ are Capital Cost Allowance, Business Home Use, and Use of a Vehicle. Many expenses that you might expect could be used, such as entertainment, are not permitted.

    In my experience, more often than not, if a broker or lender will just take the time to review your tax returns in depth, for add-backs etc, you will qualify without having to resort to a stated income program and, in turn, will save thousands of dollars in premium and mortgage interest.

    So, if you are a self-employed individual looking to qualify for your mortgage, be sure to speak with a qualified mortgage planner and discuss these avenues to see if they are applicable to your situation.

2Comments
  • Posted by cna training on May 15, 2010 at 6:23 pm

    Keep posting stuff like this i really like it

    Reply
  • Posted by Ron on May 23, 2012 at 4:21 pm

    Interested in a float home in Richmond. Asking price 155000.00 Moorage 719.00 per month. I have 10-15% down.

    Curious to see if I could make this work.

    Thanks for now.

    Reply

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