Over the past couple of years, it has become increasingly difficult to get a mortgage for self-employed clients, and the move by the CMHC to limit its insurance coverage to those without income validation will only make things harder.
Self-employed borrowers still have access to mortgages with down payments below 20%; they just have to prove two years of income to secure the loan. This is reasonable in theory, but self-employed people have a misaligned incentive to minimize income for tax purposes.
Requirements like these have been a boon to lenders who charge a bit more on mortgages for self-employed clients. Known as “Alt-A`s“, they fall somewhere between the prime and sub-prime market in terms of the amount of risk they are willing to accept. They are lending to more and more people who only a couple of years ago would have been welcomed by the banks.
So how much more can alternative borrowers expect to pay? There is a misconception that the rates are double than that of the banks. A rule of thumb is a few percentage points higher than the banks. But some pay less and some pay more, depending on the perceived risk. People who do not qualify for a mortgage in the Alt-A market can are often referred to the Private market, where money is lent by individual investors. As unregulated lenders, they have the most flexibility to offer non-traditional financing.
Right now, there are two ways self-employed borrowers can get an insured mortgage: 1) with income validation and 2) without income validation. What is income validation? According to the CMHC, “copies of [a borrower’s] Notice of Assessment, audited financial statements or unaudited financial statements prepared by an independent third party, for the previous two year period”. In the second case, self-employed borrowers can bypass income validation with a 10% down payment and a good credit score – within reason. Anyone stating income over $100K faces increased scrutiny.
Genworth and Canada Guaranty have similar mortgage for self-employed programs. Their programs are designed for borrowers who are unable to provide traditional income verification but have a proven 2-year history of managing their credit and finances responsibly. Eligible borrowers typically own a small size business for a minimum of two years, which can be confirmed via a third-party arms-length document. In addition, the borrower is required to declare their annual income, which should be reasonable based on the industry, length of operation and type of business.
- Purchase transactions: 90% LTV
- Refinance transactions: 80% LTV
- The income reported by the borrower must be reasonable based on the industry, length of operation and type of business
- Strong credit profile with minimum 2 trade lines with at least two (2) years history
- No mortgage, installment or revolving credit delinquencies appearing on the credit bureau in the past 12 months
- No reported defaults on residential mortgages for the past 7 years
- No previous bankruptcy
- Minimum 5% down payment from the borrowers own savings. The remainder may be gifted from an immediate family member. Borrowed down payments are not permitted.
- Borrowers with commission income are ineligible
- Lender to ensure borrower(s) have no tax arrears
- All applicants used to qualify must occupy the property (If two unit property, one unit must be owner occupied)
- Spousal guarantors acceptable
- Borrowers are permitted one insured mortgage
- Home Purchase & Refinance Program
- Progress Advance Program
- Purchase Plus Improvement Program
- Second Mortgage Program
- Cashback Equity Program
- Family Plan Program
- New to Canada Program
- Investment Property Program
- Vacation/Secondary Homes Program
Contact me today to see what you qualify for or if you have further questions!