Self-Employed Borrowers Could See Tougher Times Ahead
Recent studies have shown that self employment is on the rise, making up approximately 15% of the workforce in Canada. However, the trend is making it more difficult for the self-employed and other unique prospective mortgage clients to get a mortgage.
Many major lenders have quietly eliminated their stated income programs or are tightening their lending review process for self-employed individuals. This move comes with the growing fear around household debt and CMHC’s recent announcement that they are reaching the $600-billion cap for mortgage insurance set by the Federal Government.
The stated income programs were originally introduced to deal with the unique situations that self-employed residents have with the large amount of write-off expenses they have. Since self-employed individuals are able to write-off many expenses such as car payments or housing payments, their claimed income does not really reflect their financial situation. Permanent residents with over 3 years of business operation and a good Canadian credit history were eligible for the stated income program. Based on this program, lenders ask borrowers to state their income instead of providing the traditional forms of proof of income, like pay stubs or income tax returns.
By not being able to verify the income claimed by a self-employed borrower, the fear of clients over-committing financially increases. With worries that our housing market will “burst” like it did in America has prompted banks to be more stringent with whom they give mortgages out to.
Mortgage regulations around stated incomes had already been tightened in 2010. Self-employed borrowers who received a mortgage through the program were expected to put 10% down instead of the minimum 5% for a conventional mortgage. Refinancing a mortgage through the program was limited to 85% loan-to-value ratio (LTV). LTV represents the amount of the mortgage loan compared to the value of the property.
Self-employed individuals should expect a more extensive mortgage review process and be prepared to show documented proof of their income.
If you’re self-employed and thinking of purchasing a home, come talk to one of our mortgage specialists to help you find the mortgage that’s right for you.