Mortgage Financing for the Self Employed The Banks won’t approve me for a mortgage because I don’t declare enough income.
Introduction • Welcome to this on-line seminar which will help you get past some of the limited lending policies of some of the major lending institutions. • More and more people are realizing the tax benefits of working for themselves, or on a contract. This allows the deduction of expenses and reduce their taxable income.
Introduction • Some may also benefit from income splitting with their spouse or children. • This is great for paying less taxes, however it can be a real challenge when they walk into their bank to apply for a loan or mortgage.
Introduction • You may have been dealing with that bank for years, never missed a payment, often time paying more per month for rent, and yet you are being told ….”You don’t qualify.” • This seminar will explain how to get beyond the income restrictions and buy that new home.
Understanding why they are saying “no”. • Before I can explain how to get a mortgage approved, you need to understand why they are saying no. • Lets start with the basics… • There are generally two types of mortgages CONVENTIONAL 0% - 75% HIGH RATIO 75.1% - 95%
Understanding why they are saying “no”. CONVENTIONAL MORTGAGES • When you have a minimum 25% down payment, one would assume approvals are guaranteed. • However with most banks/trust companies they are still looking lend on a capacity basis.
Understanding why they are saying “no”. • Lending by capacity still means the lender needs confirmation of income to service all debts. • Confirmation of income for self employed individuals requires you to provide 3 years notice of assessments and copies of tax returns.
Understanding why they are saying “no”. The notice of assessments provides 3 things to the lender. • Confirmation of the actual taxable income declared to Revenue Canada. • It shows that you have filed your tax returns. • It will also confirm that you do not have significant monies owing to Revenue Canada.
Understanding why they are saying “no”. • The tax returns will provide confirmation of the stability of your company. • It will also provide confirmation of certain expenses that may be added back to your taxable income, (interest and depreciation expenses).
Understanding why they are saying “no”. • Most lenders are still using the GDSR and TDSR lending criteria. • GDSR – Gross Debt Service Ratio < 32% Taxable Income. • TDSR – Total Debt Service Ratio < 40% Taxable Income. • Some lenders will allow the GDSR to be as high as 35% and TDSR as high as 45% on an exception basis.
Understanding why they are saying “no”. • But these lenders still need confirmation of enough income to service your total monthly debt obligations. • When you are self employed there are certain tax advantages to maintaining high car payments, and high loan balances as you can deduct these expenses, however it is these high payments that are often why you are being declined for mortgages.
Understanding why they are saying “no”. HIGH RATIO MORTGAGES • As a percentage, more people are buying homes with less then 25% down. • Reality is with the average price of a home in Burlington now > $200,000 most people do not have access to $50,000 for a down payment. • Therefore they feel a high ratio mortgage is their only option.
Understanding why they are saying “no”. • A high ratio mortgage is a mortgage that is underwritten by a mortgage insurance company. (CMHC or GE Capital) • This allows you to purchase a home with less then 25% down. • They also charge a fee to underwrite your mortgage. This fee can be as high as 3.25% if you are only putting 5% down.
Understanding why they are saying “no”. • The mortgage underwriter also gets to make up the rules. • Believe it or not their rules are fairly basic and consistent. • Income confirmation : 3 Years Notice of Assessments and Tax Returns. • They want formal confirmation of down payment. • Generally speaking good credit history. • GDSR<32% and TDSR < 40%.
Understanding why they are saying “no”. • When verifying the income, their policy is that as long as your income each year is increasing they will average the last 3 years. • If there is a downward trend in income, (Last years income was lower then the previous years), then they will use the lower of the 2 years incomes. • This can have a significant impact on your qualifying for a mortgage.
Understanding why they are saying “no”. • If you haven't been in business for 3 years, then you have a problem. • If you had one bad year, it can take 3 more years to get beyond that year. • If you are paying yourself through repayment of shareholders loans, then you may not be declaring any income, again a problem.
Understanding why they are saying “no”. • Bottom line is if you are self employed or working on contract, the banks can only use your past track record to confirm your income. • But if you declare a high income to meet the bank’s and mortgage underwriter’s qualifying criteria then you will generally pay a significantly higher rate of taxes.
Understanding why they are saying “no”. • Most people made the decision to work for themselves for the tax benefits. • This seminar will show you how to get beyond the “Declines due to debt servicing”
CONVENTIONAL DEALS • For Conventional Deals there are basically 4 different categories of applicants. “A” Applicants • Income Taxes filed up to date with verifiable income, good credit, and confirmation of income. • Any lender will approve this deal, at their best mortgage rates.
CONVENTIONAL DEALS “B” APPLICANTS • Are applicants who have filed their taxes but do not declare adequate income to service their debts, with good credit history. • Most of the major banks won’t approve these clients, due to lack of capacity. • There are numerous “Equity lenders” who will approve these deals.
CONVENTIONAL DEALS • Equity lenders – are lenders that recognize that most self employed individuals make more money then they declare. Their good credit rating shows their ability to make good on their commitments. For “B Applicants”, they will generally charge posted rates. Some examples of Equity lenders are MCAP, Maple Trust, Home Trust, and First Line Access..
CONVENTIONAL DEALS “C” APPLICANTS • Are individuals who either have not completed tax returns but have good credit, or applicants who have completed tax returns, with some current derogatory credit, or major derogatory credit (Previous Bankrupt) Discharged minimum 2 years with good re-established credit.
CONVENTIONAL DEALS • Some of these lenders will provide posted rates up to 65%, or up to 75% at Posted Plus rates. (Some lenders are posted Plus .25% – to .50%). There is also a small fee to the lender and the mortgage broker. Examples of lenders who would be interested in this type of financing is Maple Trust, Home Trust, First Line Access, and Xceed.
CONVENTIONAL DEALS • A large percentage of equity deals fall in this category. • Since cash flow for self employed is not guaranteed, late payments are a reality. • With bankruptcies on the rise we have lenders who will tolerate these past credit problem.
CONVENTIONAL DEALS “D” APPLICANTS • Are applicants who can not provide any means of income confirmation, and have major credit problems. But have 25% downpayment. • They may have just started a new company, or have not filed a tax return for the last few years, and have current credit problems, or their bankruptcy has not been discharged for 2 years.
CONVENTIONAL DEALS • Our list of lenders is significantly shorter for these types of clients. As you can appreciate the risk of lending to these clients is substantially higher. • But I do have lenders who may be willing to fund this type of mortgage, but their rates and fees will reflect the higher level of risk. • But an approval could be available for these clients.
CONVENTIONAL DEALS • Why would someone pay higher rates just to buy a house? • 1. To re-establish their credit rating. • 2. At renewal, significantly lower rates are generally available. • 3. Instead of waiting 7 years for a bankruptcy to disappear from someone's credit bureau, they can buy today, at today’s prices, and in 7 years time their house has significantly increased in value, and they have not thrown away 7 years of rental payments.
CONVENTIONAL DEALS • Why do you need a mortgage specialist ? • No two lenders lend the same for these types of clients. • Certain equity lenders will do previous bankrupt, some will not. • Certain lenders will tolerate R3’s and 5’s but not R9’s.
CONVENTIONAL DEALS • Other advantages to using a mortgage specialist. • We only access you credit bureau once and then send it to the appropriate lender. If you get numerous declines from numerous lenders who are each accessing you credit bureau, this has a negative impact on your scoring, and many lenders will then think twice after 5 of 6 other lenders have said “NO”.
I am Self Employed and don’t have a 25% downpayment. • When I started this presentation I mentioned that there are 2 types of mortgages, conventional and high ratio. This pertains to “first” mortgages. • However there is a way that we can lend up to 90% loan to value, and avoid needing a mortgage underwriter like CMHC or GE Capital.
I am Self Employed and don’t have a 25% downpayment • By eliminating CMHC/GE Capital we also eliminate their lending restrictions. • By utilizing a 75% first mortgage, and a 10% -15% second mortgage, CMHC/GE Capital underwriting is not required. This will save you the 2.0% CMHC fee right up front, and remove many of the restrictive policies that might be preventing you from qualifying for a mortgage.
I am Self Employed and don’t have a 25% downpayment • Now please keep in mind that this program is generally reserved for clients who do not meet the standard qualifying criteria. • More specifically, they can not confirm enough income to satisfy the 32% GDS, 40% TDS, and/or they have significant credit problems. • This is a solution that will make homeownership a reality.
I am Self Employed and don’t have a 25% downpayment • Many people are often intimidated with the possibility of a 2nd mortgage. • Or they feel the rates are too high. • A first and second mortgage will create too high of a payment.
I am Self Employed and don’t have a 25% downpayment • I will show you a direct comparison of how much more a 1st and 2nd mortgage will cost you. • Although interest rate is important, your total monthly payment is what should be considered.
Cost Comparison CMHC vs. 1st and 2nd Mortgage • Example Purchase Price $175,000 Property taxes $2000 per year Client has $17,500 Downpayment
Cost Comparison CMHC vs. 1st and 2nd Mortgage • Standard High Ratio mortgage • Purchase Price $175,000 • Down Payment $17,500 • Net Mortgage $157,500 • 2.0% CMHC Fee $ 3150.00 • Total Mortgage $160,650 • $160,650 at 7% (sample 5 year mortgage rate) with 25 year amortization. PAYMENT = $1125.22
Cost Comparison CMHC vs. 1st and 2nd Mortgage • Standard High Ratio mortgage • Qualifying Criteria. • Mortgage Payment $1125.22 per month • Property taxes $ 166.66 per month • Heat $ 75.00 per month • Total $1366.88 • Minimum 3 year average taxable income to qualify with CMHC/GE Capital $51,258
Cost Comparison CMHC vs. 1st and 2nd Mortgage • 1st and 2nd Mortgage • Purchase Price $ 175,000 • Down Payment $17,500 • 1st Mortgage $131,250 • 2nd Mortgage $26,250 • Please note you are saving a $3150 CMHC/GE Capital Fee.
Cost Comparison CMHC vs. 1st and 2nd Mortgage • 1st and 2nd Mortgage • $131,250 1st Mortgage @ 8.00 (sample 2 year term, 25 year amortization) Payment $1001.72 • $26,250 2nd Mortgage @ 13.50% (sample 2 year term for 2nd mortgage, 25 year amortization) Payment $298.73 • Total Mortgage Payments $1300.45
Cost Comparison CMHC vs. 1st and 2nd Mortgage • 1st and 2nd Mortgage • The minimum income to qualify is no longer an issue. The rates/payments quoted were based on the assumption that the applicant had good credit and had filed an up to date tax return.
Cost Comparison CMHC vs. 1st and 2nd Mortgage Standard High Ratio Mortgage Payment $1125.22 1st and 2nd Mortgage Payment $1300.45 The 1st and 2nd mortgage does Cost $175.23 per month more But saves you the $3150 CMHC Fee
Cost Comparison CMHC vs. 1st and 2nd Mortgage • For clients who do not meet the standard bank and mortgage underwriters lending criteria, this is a viable alternative that will enable you to buy a house. • Have your cake and eat it too!! Show little income, pay less taxes and be qualified for a mortgage.
Cost Comparison CMHC vs. 1st and 2nd Mortgage • Lets face it, the $175.23 per month is substantially less than the taxes you would have had to pay if you had declared the necessary income to qualify for this mortgage. • The extra $175.23 per month is a small price to pay to not have to rent for the next 3 years waiting until you have the completed tax returns.
Cost Comparison CMHC vs. 1st and 2nd Mortgage • The $175.23 is also a small price to pay to not have to settle on a style of home that your bank told you was all you could afford based on your income.
Conclusion • Being self employed myself I have been forced to endure many of these lending limitations by the banks in the past. • I know which Financial Institutions will approve your mortgage and which ones won’t. • Let my experience with funding mortgages for self employed individuals make owning a home a reality.
Conclusion If you would like additional information about mortgage financing for the self employed, please call me at 1-905-336-8448 and ask for David Kendall or email me at email@example.com Feel free to visit our “Online Seminar Survey” located in the Online Seminars Section of Burlington Homebuyers.com
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