Mortgage Financing for the Self Employed The Banks won’t approve me for a mortgage because I...

Mortgage Financing for the Self Mortgage Financing for the Self EmployedEmployed

The Banks won’t approve me for a The Banks won’t approve me for a mortgage because I don’t declare mortgage because I don’t declare

enough income. enough income.

IntroductionIntroduction

Welcome to this on-line seminar which will Welcome to this on-line seminar which will help you get past some of the limited help you get past some of the limited lending policies of some of the major lending policies of some of the major lending institutions.lending institutions.

More and more people are realizing the tax More and more people are realizing the tax benefits of working for themselves, or on a benefits of working for themselves, or on a contract. This allows the deduction of contract. This allows the deduction of expenses and reduce their taxable income.expenses and reduce their taxable income.


Some may also benefit from income Some may also benefit from income splitting with their spouse or children.splitting with their spouse or children.

This is great for paying less taxes, however This is great for paying less taxes, however it can be a real challenge when they walk it can be a real challenge when they walk into their bank to apply for a loan or into their bank to apply for a loan or mortgage.mortgage.


You may have been dealing with that bank You may have been dealing with that bank for years, never missed a payment, often for years, never missed a payment, often time paying more per month for rent, and time paying more per month for rent, and yet you are being told ….”You don’t yet you are being told ….”You don’t qualify.”qualify.”

This seminar will explain how to get This seminar will explain how to get beyond the income restrictions and buy that beyond the income restrictions and buy that new home. new home.

Understanding why they are Understanding why they are saying “no”.saying “no”.

Before I can explain how to get a mortgage Before I can explain how to get a mortgage approved, you need to understand why they approved, you need to understand why they are saying no.are saying no.

Lets start with the basics… Lets start with the basics… There are generally two types of mortgages There are generally two types of mortgages

CONVENTIONAL

0% - 75%HIGH RATIO 75.1% - 95%


CONVENTIONAL MORTGAGESCONVENTIONAL MORTGAGES When you have a minimum 25% down When you have a minimum 25% down

payment, one would assume approvals are payment, one would assume approvals are guaranteed.guaranteed.

However with most banks/trust companies However with most banks/trust companies they are still looking lend on a capacity they are still looking lend on a capacity basis.basis.


Lending by capacity still means the lender Lending by capacity still means the lender needs confirmation of income to service all needs confirmation of income to service all debts. debts.

Confirmation of income for self employed Confirmation of income for self employed individuals requires you to provide 3 years individuals requires you to provide 3 years notice of assessments and copies of tax notice of assessments and copies of tax returns. returns.


The notice of assessments provides 3 things to The notice of assessments provides 3 things to the lender. the lender.

Confirmation of the actual taxable income Confirmation of the actual taxable income declared to Revenue Canada.declared to Revenue Canada.

It shows that you have filed your tax It shows that you have filed your tax returns. returns.

It will also confirm that you do not have It will also confirm that you do not have significant monies owing to Revenue significant monies owing to Revenue Canada. Canada.


The tax returns will provide confirmation of The tax returns will provide confirmation of the stability of your company.the stability of your company.

It will also provide confirmation of certain It will also provide confirmation of certain expenses that may be added back to your expenses that may be added back to your taxable income, (interest and depreciation taxable income, (interest and depreciation expenses). expenses).


Most lenders are still using the GDSR and Most lenders are still using the GDSR and TDSR lending criteria.TDSR lending criteria.

GDSR – Gross Debt Service Ratio < 32% GDSR – Gross Debt Service Ratio < 32% Taxable Income. Taxable Income.

TDSR – Total Debt Service Ratio < 40% TDSR – Total Debt Service Ratio < 40% Taxable Income.Taxable Income.

Some lenders will allow the GDSR to be as Some lenders will allow the GDSR to be as high as 35% and TDSR as high as 45% on high as 35% and TDSR as high as 45% on an exception basis. an exception basis.


But these lenders still need confirmation of But these lenders still need confirmation of enough income to service your total enough income to service your total monthly debt obligations. monthly debt obligations.

When you are self employed there are When you are self employed there are certain tax advantages to maintaining high certain tax advantages to maintaining high car payments, and high loan balances as car payments, and high loan balances as you can deduct these expenses, however it you can deduct these expenses, however it is these high payments that are often why is these high payments that are often why you are being declined for mortgages. you are being declined for mortgages.


HIGH RATIO MORTGAGESHIGH RATIO MORTGAGES As a percentage, more people are buying As a percentage, more people are buying

homes with less then 25% down. homes with less then 25% down. Reality is with the average price of a home Reality is with the average price of a home

in Burlington now > $200,000 most people in Burlington now > $200,000 most people do not have access to $50,000 for a down do not have access to $50,000 for a down payment. payment.

Therefore they feel a high ratio mortgage is Therefore they feel a high ratio mortgage is their only option. their only option.


A high ratio mortgage is a mortgage that is A high ratio mortgage is a mortgage that is underwritten by a mortgage insurance underwritten by a mortgage insurance company. (CMHC or GE Capital)company. (CMHC or GE Capital)

This allows you to purchase a home with This allows you to purchase a home with less then 25% down.less then 25% down.

They also charge a fee to underwrite your They also charge a fee to underwrite your mortgage. This fee can be as high as 3.25% mortgage. This fee can be as high as 3.25% if you are only putting 5% down. if you are only putting 5% down.


The mortgage underwriter also gets to make up the The mortgage underwriter also gets to make up the rules.rules.

Believe it or not their rules are fairly basic and Believe it or not their rules are fairly basic and consistent. consistent.

Income confirmation : 3 Years Notice of Income confirmation : 3 Years Notice of Assessments and Tax Returns.Assessments and Tax Returns.

They want formal confirmation of down payment.They want formal confirmation of down payment. Generally speaking good credit history.Generally speaking good credit history. GDSR<32% and TDSR < 40%. GDSR<32% and TDSR < 40%.


When verifying the income, their policy is When verifying the income, their policy is that as long as your income each year is that as long as your income each year is increasing they will average the last 3 years.increasing they will average the last 3 years.

If there is a downward trend in income, If there is a downward trend in income, (Last years income was lower then the (Last years income was lower then the previous years), then they will use the lower previous years), then they will use the lower of the 2 years incomes. of the 2 years incomes.

This can have a significant impact on your This can have a significant impact on your qualifying for a mortgage. qualifying for a mortgage.


If you haven't been in business for 3 years, If you haven't been in business for 3 years, then you have a problem.then you have a problem.

If you had one bad year, it can take 3 more If you had one bad year, it can take 3 more years to get beyond that year.years to get beyond that year.

If you are paying yourself through If you are paying yourself through repayment of shareholders loans, then you repayment of shareholders loans, then you may not be declaring any income, again a may not be declaring any income, again a problem. problem.


Bottom line is if you are self employed or Bottom line is if you are self employed or working on contract, the banks can only use working on contract, the banks can only use your past track record to confirm your your past track record to confirm your income.income.

But if you declare a high income to meet But if you declare a high income to meet the bank’s and mortgage underwriter’s the bank’s and mortgage underwriter’s qualifying criteria then you will generally qualifying criteria then you will generally pay a significantly higher rate of taxes. pay a significantly higher rate of taxes.


Most people made the decision to work for Most people made the decision to work for themselves for the tax benefits.themselves for the tax benefits.

This seminar will show you how to get This seminar will show you how to get beyond the “Declines due to debt servicing” beyond the “Declines due to debt servicing”

CONVENTIONAL DEALSCONVENTIONAL DEALS

For Conventional Deals there are basically For Conventional Deals there are basically 4 different categories of applicants.4 different categories of applicants.

““A” ApplicantsA” Applicants Income Taxes filed up to date with Income Taxes filed up to date with

verifiable income, good credit, and verifiable income, good credit, and confirmation of income. confirmation of income.

Any lender will approve this deal, at their Any lender will approve this deal, at their best mortgage rates.best mortgage rates.


““B” APPLICANTSB” APPLICANTS Are applicants who have filed their taxes Are applicants who have filed their taxes

but do not declare adequate income to but do not declare adequate income to service their debts, with good credit history.service their debts, with good credit history.

Most of the major banks won’t approve Most of the major banks won’t approve these clients, due to lack of capacity.these clients, due to lack of capacity.

There are numerous “Equity lenders” who There are numerous “Equity lenders” who will approve these deals. will approve these deals.


Equity lenders – are lenders that recognize Equity lenders – are lenders that recognize that most self employed individuals make that most self employed individuals make more money then they declare. Their good more money then they declare. Their good credit rating shows their ability to make credit rating shows their ability to make good on their commitments. For “B good on their commitments. For “B Applicants”, they will generally charge Applicants”, they will generally charge posted rates. Some examples of Equity posted rates. Some examples of Equity lenders are MCAP, Maple Trust, Home lenders are MCAP, Maple Trust, Home Trust, and First Line Access.. Trust, and First Line Access..


““C” APPLICANTSC” APPLICANTS Are individuals who either have not Are individuals who either have not

completed tax returns but have good credit, completed tax returns but have good credit, or applicants who have completed tax or applicants who have completed tax returns, with some current derogatory returns, with some current derogatory credit, or major derogatory credit (Previous credit, or major derogatory credit (Previous Bankrupt) Discharged minimum 2 years Bankrupt) Discharged minimum 2 years with good re-established credit. with good re-established credit.


Some of these lenders will provide posted Some of these lenders will provide posted rates up to 65%, or up to 75% at Posted rates up to 65%, or up to 75% at Posted Plus rates. (Some lenders are posted Plus rates. (Some lenders are posted Plus .25% – to .50%). There is also a small Plus .25% – to .50%). There is also a small fee to the lender and the mortgage broker. fee to the lender and the mortgage broker. Examples of lenders who would be Examples of lenders who would be interested in this type of financing is Maple interested in this type of financing is Maple Trust, Home Trust, First Line Access, and Trust, Home Trust, First Line Access, and Xceed. Xceed.


A large percentage of equity deals fall in A large percentage of equity deals fall in this category. this category.

Since cash flow for self employed is not Since cash flow for self employed is not guaranteed, late payments are a reality.guaranteed, late payments are a reality.

With bankruptcies on the rise we have With bankruptcies on the rise we have lenders who will tolerate these past credit lenders who will tolerate these past credit problem. problem.


““D” APPLICANTSD” APPLICANTS Are applicants who can not provide any means of Are applicants who can not provide any means of

income confirmation, and have major credit income confirmation, and have major credit problems. But have 25% downpayment.problems. But have 25% downpayment.

They may have just started a new company, or They may have just started a new company, or have not filed a tax return for the last few years, have not filed a tax return for the last few years, and have current credit problems, or their and have current credit problems, or their bankruptcy has not been discharged for 2 years. bankruptcy has not been discharged for 2 years.


Our list of lenders is significantly shorter Our list of lenders is significantly shorter for these types of clients. As you can for these types of clients. As you can appreciate the risk of lending to these appreciate the risk of lending to these clients is substantially higher. clients is substantially higher.

But I do have lenders who may be willing But I do have lenders who may be willing to fund this type of mortgage, but their rates to fund this type of mortgage, but their rates and fees will reflect the higher level of risk.and fees will reflect the higher level of risk.

But an approval could be available for these But an approval could be available for these clients. clients.


Why would someone pay higher rates just to buy a Why would someone pay higher rates just to buy a house?house?

1. To re-establish their credit rating.1. To re-establish their credit rating. 2. At renewal, significantly lower rates are 2. At renewal, significantly lower rates are

generally available.generally available. 3. Instead of waiting 7 years for a bankruptcy to 3. Instead of waiting 7 years for a bankruptcy to

disappear from someone's credit bureau, they can disappear from someone's credit bureau, they can buy today, at today’s prices, and in 7 years time buy today, at today’s prices, and in 7 years time their house has significantly increased in value, their house has significantly increased in value, and they have not thrown away 7 years of rental and they have not thrown away 7 years of rental payments. payments.


Why do you need a mortgage specialist ?Why do you need a mortgage specialist ? No two lenders lend the same for these No two lenders lend the same for these

types of clients. types of clients. Certain equity lenders will do previous Certain equity lenders will do previous

bankrupt, some will not. bankrupt, some will not. Certain lenders will tolerate R3’s and 5’s Certain lenders will tolerate R3’s and 5’s

but not R9’s. but not R9’s.


Other advantages to using a mortgage specialist. Other advantages to using a mortgage specialist. We only access you credit bureau once and then We only access you credit bureau once and then

send it to the appropriate lender. If you get send it to the appropriate lender. If you get numerous declines from numerous lenders who numerous declines from numerous lenders who are each accessing you credit bureau, this has a are each accessing you credit bureau, this has a negative impact on your scoring, and many negative impact on your scoring, and many lenders will then think twice after 5 of 6 other lenders will then think twice after 5 of 6 other lenders have said “NO”. lenders have said “NO”.

I am Self Employed and don’t I am Self Employed and don’t have a 25% downpayment.have a 25% downpayment.

When I started this presentation I mentioned When I started this presentation I mentioned that there are 2 types of mortgages, that there are 2 types of mortgages, conventional and high ratio. This pertains conventional and high ratio. This pertains to “first” mortgages.to “first” mortgages.

However there is a way that we can lend up However there is a way that we can lend up to 90% loan to value, and avoid needing a to 90% loan to value, and avoid needing a mortgage underwriter like CMHC or GE mortgage underwriter like CMHC or GE Capital. Capital.

I am Self Employed and don’t I am Self Employed and don’t have a 25% downpaymenthave a 25% downpayment

By eliminating CMHC/GE Capital we also By eliminating CMHC/GE Capital we also eliminate their lending restrictions.eliminate their lending restrictions.

By utilizing a 75% first mortgage, and a By utilizing a 75% first mortgage, and a 10% -15% second mortgage, CMHC/GE 10% -15% second mortgage, CMHC/GE Capital underwriting is not required. This Capital underwriting is not required. This will save you the 2.0% CMHC fee right up will save you the 2.0% CMHC fee right up front, and remove many of the restrictive front, and remove many of the restrictive policies that might be preventing you from policies that might be preventing you from qualifying for a mortgage. qualifying for a mortgage.


Now please keep in mind that this program Now please keep in mind that this program is generally reserved for clients who do not is generally reserved for clients who do not meet the standard qualifying criteria. meet the standard qualifying criteria.

More specifically, they can not confirm More specifically, they can not confirm enough income to satisfy the 32% GDS, enough income to satisfy the 32% GDS, 40% TDS, and/or they have significant 40% TDS, and/or they have significant credit problems.credit problems.

This is a solution that will make This is a solution that will make homeownership a reality. homeownership a reality.


Many people are often intimidated with the Many people are often intimidated with the possibility of a 2possibility of a 2ndnd mortgage. mortgage.

Or they feel the rates are too high. Or they feel the rates are too high. A first and second mortgage will create too A first and second mortgage will create too

high of a payment. high of a payment.


I will show you a direct comparison of how I will show you a direct comparison of how much more a 1much more a 1stst and 2 and 2ndnd mortgage will cost mortgage will cost you. you.

Although interest rate is important, your Although interest rate is important, your total monthly payment is what should be total monthly payment is what should be considered. considered.

Cost Comparison CMHC vs. 1Cost Comparison CMHC vs. 1stst and 2and 2ndnd Mortgage Mortgage

ExampleExample

Purchase Price $175,000

Property taxes $2000 per year

Client has $17,500 Downpayment


Standard High Ratio mortgageStandard High Ratio mortgage Purchase Price $175,000Purchase Price $175,000 Down Payment Down Payment $17,500$17,500 Net Mortgage $157,500Net Mortgage $157,500 2.0% CMHC Fee 2.0% CMHC Fee $ 3150.00$ 3150.00 Total Mortgage $160,650Total Mortgage $160,650 $160,650 at 7% (sample 5 year mortgage rate) with 25 $160,650 at 7% (sample 5 year mortgage rate) with 25

year amortization. year amortization. PAYMENT = $1125.22PAYMENT = $1125.22


Standard High Ratio mortgageStandard High Ratio mortgage Qualifying Criteria.Qualifying Criteria. Mortgage Payment $1125.22 per monthMortgage Payment $1125.22 per month Property taxes $ 166.66 per monthProperty taxes $ 166.66 per month Heat Heat $ 75.00 $ 75.00 per monthper month Total $1366.88Total $1366.88 Minimum 3 year average taxable income to Minimum 3 year average taxable income to

qualify with CMHC/GE Capital $51,258qualify with CMHC/GE Capital $51,258


11stst and 2 and 2ndnd Mortgage Mortgage Purchase Price $ 175,000Purchase Price $ 175,000 Down Payment $17,500Down Payment $17,500 11stst Mortgage $131,250 Mortgage $131,250 22ndnd Mortgage $26,250 Mortgage $26,250

Please note you are saving a $3150 Please note you are saving a $3150 CMHC/GE Capital Fee. CMHC/GE Capital Fee.


11stst and 2 and 2ndnd Mortgage Mortgage $131,250 1$131,250 1stst Mortgage Mortgage @ 8.00 (sample 2 @ 8.00 (sample 2

year term, 25 year amortization) year term, 25 year amortization) Payment Payment $1001.72$1001.72

$26,250 2$26,250 2ndnd Mortgage Mortgage @ 13.50% (sample 2 @ 13.50% (sample 2 year term for 2year term for 2ndnd mortgage, 25 year mortgage, 25 year amortization) amortization) Payment $298.73Payment $298.73

Total Mortgage Payments $1300.45Total Mortgage Payments $1300.45


11stst and 2 and 2ndnd Mortgage Mortgage The minimum income to qualify is no The minimum income to qualify is no

longer an issue. The rates/payments quoted longer an issue. The rates/payments quoted were based on the assumption that the were based on the assumption that the applicant had good credit and had filed an applicant had good credit and had filed an up to date tax return. up to date tax return.


Standard High Ratio Mortgage Payment

$1125.22

1st and 2nd MortgagePayment$1300.45

The 1st and 2nd mortgage does Cost $175.23 per month more

But saves you the $3150 CMHC Fee

The 1st and 2nd mortgage does Cost $175.23 per month more

But saves you the $3150 CMHC Fee


For clients who do not meet the standard For clients who do not meet the standard bank and mortgage underwriters lending bank and mortgage underwriters lending criteria, this is a viable alternative that will criteria, this is a viable alternative that will enable you to buy a house. enable you to buy a house.

Have your cake and eat it too!! Show little Have your cake and eat it too!! Show little income, pay less taxes and be qualified for a income, pay less taxes and be qualified for a mortgage. mortgage.


Lets face it, the $175.23 per month is Lets face it, the $175.23 per month is substantially less than the taxes you would substantially less than the taxes you would have had to pay if you had declared the have had to pay if you had declared the necessary income to qualify for this necessary income to qualify for this mortgage.mortgage.

The extra $175.23 per month is a small The extra $175.23 per month is a small price to pay to not have to rent for the next price to pay to not have to rent for the next 3 years waiting until you have the 3 years waiting until you have the completed tax returns.completed tax returns.


The $175.23 is also a small price to pay to The $175.23 is also a small price to pay to not have to settle on a style of home that not have to settle on a style of home that your bank told you was all you could afford your bank told you was all you could afford based on your income. based on your income.

ConclusionConclusion

Being self employed myself I have been Being self employed myself I have been forced to endure many of these lending forced to endure many of these lending limitations by the banks in the past. limitations by the banks in the past.

I know which Financial Institutions will I know which Financial Institutions will approve your mortgage and which ones approve your mortgage and which ones won’t. won’t.

Let my experience with funding mortgages Let my experience with funding mortgages for self employed individuals make owning for self employed individuals make owning a home a reality.a home a reality.


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 protected]

Feel free to visit our “Online Seminar Survey” located in the Online Seminars Section of Burlington Homebuyers.com


To leave this presentation, just click on the To leave this presentation, just click on the “X” located on the top right hand corner of “X” located on the top right hand corner of this window.this window.

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Mortgage Financing for the Self Employed The Banks won’t approve me for a mortgage because I...

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