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Archive for the ‘Self Employed Borrowers’ Category

How Self Employed Borrowers get a Mortgage in Vancouver – Rowan Smith Mortgage Broker Explains

Thursday, April 26th, 2012

Transcript of Video Blog:

Hi, everybody. Rowan Smith from the Mortgage Center. I want to talk today about self-employed people and what the banks want to see from you in terms of the income documentation.

Like everybody else, they want to see notices of assessment to prove that you’re filing your income-tax, as in you have no arrears, and they want to see how much your filing on there.

But what about somebody who’s been a plumber for 25 years and finally decides to go out on their own. They go out on their own and they’re making way more money, but they’ve only been doing it for a year and a half.

Here’s the thing, that’s a tricky situation for a bank. The bank wants to see that you’ve got a two-year track record of income. But if you were employed back then and now you’re self-employed, how do they make the connection?

Now, not all banks, but several of them have a much more open idea here. What they’ll do is they’ll look at your historical earnings as a plumber, or whatever your job was. As long as you transitioned into self-employment in the same industry doing the same thing they’ll use an average of income over those years, including your start-up years, but also including your years as a salaried employee.

This is particularly important for a guy who’s been self-employed for only one year but has been doing something for 25 years. Often times they move to self-employment not because they were foolish but because they saw there was a lot more money to be made if they were the boss rather than just collecting a salary.

So, if you know somebody in this circumstance, someone who’s been told, “You haven’t been in business long enough,” but they’ve been doing the same job for a very long time, have them contact me. It’s Rowan Smith from the Mortgage Center.

File Your Taxes if You Are Self Employed!!!

Tuesday, September 28th, 2010

Transcript of Video:

Hi, everyone. It’s Rowan Smith from the Mortgage Centre. Today’s blog post is going to be very brief.

If you’re self-employed, file your 2009 taxes. If you haven’t filed them at this point in the year – and I don’t care when your fiscal year end is; I’m talking about your personal income taxes – file your income taxes.

If you haven’t filed them at this point, chances are I can’t help you. There might be exceptions to that depending on your industry and depending on a number of different factors, but please, call me before writing an offer if you haven’t filed your taxes. It is of paramount importance.

For the Mortgage Centre, I’m Rowan Smith.

Stated Income – Self Employed Mortgage Borrowers

Friday, September 17th, 2010

Transcript of Video Blog:

Hi, everyone. It’s Rowan Smith from the Mortgage Centre. I’ve had several calls this week that have all dealt with stated income programs, people saying, “How come I can’t use stated income?”.

Let me explain what stated income is. Stated income is a program that was designed for self-employed and fully commissioned people who have a difficult time confirming their income through traditional standards. That’s right off of the box, as it were.

What that really means is self-employed people that earn cash under the table doing jobs, contract jobs, or maybe their income’s difficult to prove because they have a lot of write-offs such as use of home, capital cost allowance and depreciation, all of these situations. So if you know somebody who’s self-employed and says they can’t get a mortgage, we could look at using a stated income mortgage application.

Now having said that, stated income does not mean fabricated income. There has to be an element of reasonability here. If someone says they make $90,000 a year as a hair salon owner, that’s reasonable if we can show that they in fact have gross revenues that exceed that.

We don’t want to see somebody who files $10,000 of taxes but tells me they make $100,000. Something doesn’t add up with that. I wouldn’t want to lend them money on that if I was a lender, and I don’t expect that they should.

So if you know someone who’s trying to state an unreasonable amount of income, don’t bother wasting your time with it. It’s not going to get done. It has to be reasonable, and it has to be based on their actual earnings, something that’s verifiable but perhaps not fully taxable because of various number of reasons.

Let me give you an example where someone with stated income made perfect sense. I dealt with a very wealthy individual who owns multiple corporations. He pays himself from T4s from various corporations in his personal name. His personal name only shows $60,000 a year, but he makes about $600,000 a year of income.

This is a classic case where stated income made perfect sense for us to use it. He can document through his financial statements that he’s making millions of dollars of revenue, but he’s only pulling out in his personal name a certain amount.

Now that’s because his companies are in fact paying his mortgage. That doesn’t mean he’s not earning the money; it just means that from an accounting standpoint it’s difficult to document.

So, stated income: it’s a great program out there, but it only applies to people that legitimately have the earnings but can’t document it one way or the other.

You can expect that crystal-clean credit is going to be required for stated income. It’s not going to be available for someone that’s had a lot of problems. At least it may be available, but not at fully discounted rates.

So if anyone in those situations that I’ve described thinks they could use a helping hand, I’m Rowan Smith from the Mortgage Centre.

Mortgage Changes Continue – Stated Income Limited

Wednesday, March 10th, 2010

More mortgage changes are commented on, particularly, those for self employed people:

Transcript of Video Blog:

Hi everybody, Rowan Smith at the Mortgage Centre. So once again, there’s been another rule change that’s come down and this one deals specifically with self-employed people.

I have heard statistics, and I have nothing to back this up, but I have heard statistics that over 60 percent of the people in BC are self-employed or have some self-employment income. So, if that’s the case, this rule is going to effect a lot of people.

Previously, if you had a very good credit rating, and I mean pristine. You were able to put five percent down and if you were self-employed, you could state your income. You did not have to document it. You did have to document that it was reasonable, that that number was not just something that you fictitiously pulled out of the air; because that would be mortgage fraud.

You had to document simply that you had a business for the last couple of years, or that you’ve been in the field for a couple of years. You can’t do five percent down under that program any more. The fact is on April 19th, you are only going to be able to do 90 percent financing. You will require 10 percent down as a self-employed person, if you can’t document your income under traditional rules.

Now how many of these deals are out there and how many people are affected by this? Generally, self-employed people, I would say, they’re usually putting down 10 percent or more down. I did not get a lot of five percent down self-employed stated income programs.

I have seen, I can count on my hands in the last 40 years, so I don’t think that this change is necessarily going to affect a lot of people in the market as a whole, but it will bring some stability back again. This is the whole purpose of the government’s changes, is to prevent speculation and there has been a lot of it in the last while and some of these stated income programs have certainly been taken advantage of by some banks, lenders, and brokers.

So, if you have any questions about stated income, or if you’re self-employed and you’re thinking of buying a place and you’re not sure if you qualify under the new guidelines, please give me a call. It’s Rowan Smith from the Mortgage Centre.

MYTHBUSTING: “I have 35% down payment so I don’t have to prove income…”

Thursday, January 8th, 2009

There was a time, not so long ago, when a buyer with 35% down payment basically was guaranteed approval. In fact, there was a time when I heard brokers remark amongst themselves that with 35% down payment, the applicant didn’t even need a job! The scary thing was, they were right!

Oftentimes, mortgages (whether a purchase, renewal, or refinance) with 35% down were referred to as “equity mortgages” as the client had so much equity in the property that the lender didn’t spend as much time on other important elements of lending due diligence.

However, times have changed. Having 35% down indicates a very strong applicant, but lenders have learned (after watching the US meltdown and going through their own foreclosures) that just having 35% down doesn’t guarantee that the mortgage is “safe.”

The fundamental problem with the exotic and dangerous “sub prime” mortgages in the US was the lack of lender due diligence with regards to PROVING INCOME. Lenders often took “stated income” (just a verbal or written statement from the client) or “lite docs” (less than normal income verification) and funded mortgages in circumstances where they shouldn’t have. This type of underwriting slowly made its way into Canada, but unlike the US, lenders in Canada insisted on far larger (35%) down payments before they would waive income. As the real estate market continued moving higher, the percentage of down payment required dropped further – especially for self employed people who, due to write offs, have a notoriously hard time proving income – and further and further until, at it’s peak, a person with 5% down could buy a home even without proving their income!

Times have changed. As market prices have plummetted all over the planet, and particularly in the higher priced markets, lender guidelines have tightened. The single most important change has been lender demands to PROVE INCOME. I have written several other articles on this topic, and in every one I have said that lenders are now asking for more and clearer proof of income.

Consider the following: a building contractor that is paid 50% in cash (under the table) and 50% via cheque (above board) will also “write down” their income as much as possible using all available expenses as tax deductions. Subsequently, after making $80,000 a year (before tax – above board) and $25,000 a year (after tax) for the past 5 years, they decide they would like to buy a home. What number do most lenders use to qualify them for the purchase? The $25,000 taxable income even though the guy received another $80,000 of cash under the table.

If an applicant has very good credit, and can prove they have a business, they MAY be able to avoid fully proving all their income. However, if the applicant works for someone else and is paid hourly, salary, commissions, or any other payment from that is NOT from self employment, then they WILL HAVE TO PROVE THEY EARN SUFFICIENT INCOME TO SERVICE THE DEBT.

Just having a large down payment is no longer a guarantee of approval. Was it a virtual guarantee before? Yes, but markets, just like seasons, change in predictable cycles, and the mortgage market has changed.

Lastly, just having a down payment that is large ignores the fundamental fact about the mortgage: the property! If the property is a recreational property, or located in a remote area, or extra large acreage, or in the Agricultural Land Reserve, or any other number of factors, the lender may want even MORE down payment, or not do the deal at all! The property is a fundamental factor in any mortgage (it is the security for the lender) and just having a large down payment isn’t enough.

Can I get you approved with 35% down? It is very very likely, but it isn’t a guarantee, and I’m tired of hearing person after person saying, “I know a guy that can get ANY mortgage approved if you have 35% down”,” because that fact simply isn’t true any longer.