Buying a home and getting a mortgage can be complicated. Adding the factor of being self employed, can make the process a little overwhelming. Rest assured, you have come to the right place to make the process as seamless and stress free as possible for a self employed mortgage. Learn more about a self employed mortgage in Ottawa here.
Self Employed Mortgage
There are many benefits with being business for self such as pay for performance, flexible working hours and write-offs. However, sometimes those write offs can affect buying a house when a lender is looking at your two year average net annual income.
With the right planning we can make qualifying for a mortgage while being self employed easier.
To get started, here are some mortgage tips for business for self individuals:
Reduce your deductions in the years leading up to buying a house. This will help increase your Line 150 from your Notice of Assessments. Therefore, this will increase your average income that a lender will use to qualify you.
Keep an eye on timing. If you are planning on taking time off work, maternity leave, traveling, parental leave, etc, this could reduce your average income.
Have your taxes completed by a certified accountant instead of doing them yourself. Many lenders will use the T1 Generals if prepared by an accountant to show them a better snapshot of your income and expenses.
Talk to an Ottawa mortgage broker about self employed mortgage programs. Although some traditional lenders have moved away from stated income programs, there are still some great programs available with lenders. More options are important when it comes to being self employed. Also, with stated income mortgages a lender can look to your gross income instead of your income after deductions.
Increase your down payment or add a second mortgage. With 20% down, a lender will not typically need to follow the mortgage insurer’s (ie CMHC) more rigid guidelines. This may allow you more flexibility.
There is one main challenge when applying for a mortgage when self employed. The challange is how much to write off versus how much to declare as income.
For those self employed, this question may arise each tax year. From a mortgage application point of view, this question can make the difference between an approval and a decline. If approved, this question will help determine what you will qualify for.
For those self employed, a bank will typically use a two year average income from your line 150 from your Notice of Assessment or T1 General. The line 150 is your taxable income after deductions. When a person writes off a large amount of expenses, this can dramatically reduce the line 150 income. With that, it can affect the amount they would qualify for.
A soft calculation to know what average income you should be aiming for is to take the price of home you desire and divide it by 4.5. In this example, a $400,000 house, would need an average income of about $89,000.
A full application of course will assist in determining your actual pre approval price or the income amount needed.
If the maximum purchase price that results from your Notice of Assessment income is not enough, then you can look to a gross or stated income program or to add a cosigner until the average is higher. For the gross income or stated income program a lender will look to use your gross income before deductions.
CMHC Changes For Self Employed Buyers
CMHC is making changes to assist self employed home buyers. The announcement came on July 19, 2018. CMHC noted that those who are with self employment are a large part of the Canadian workforce. The changes will help those who are self employed obtain mortgage loan insurance easier. With that, they would also have access to the best mortgage rates in Ottawa. The changes took effect October 1, 2018.
Self employed individuals typically try to write-off as many expenses as possible to minimize the income tax paid. Unfortunately when it comes to applying for a mortgage this can work against the debt to income ratio. Typically CMHC wants to see a two year average of your taxable annual income. This income is known as your line 150 from your Notice of Assessments. CMHC will now make considerations for those who have previous industry experience (or training/education). Also, who can show that they have reasonable cash on hand and who’s future earnings will be predictable. CMHC will also take into consideration those who acquire an existing business.
An example of this is someone who has worked for an employer for many years and is now switching to self employment in the same industry. This person now has a contract with their previous employer for work. Plus, they have the as well as the ability to pick up other contracts. No longer would this client need to seek alternative lending mortgages until they establishes two years of tenure with self employment.
Another change is that CMHC can now look to the Statement of Business Activity from a sole proprietor to assist in supporting the add back of certain write-offs. This can assist in boosting the gross income.
It’s great to see that in an environment of tightening mortgage rules, there is some flexibility for self employed home buyers.