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. Luckily, Canada West Mortgage can arrange financing for borrowers who cannot provide traditional confirmation of income, whether they need money for taxes, debt consolidation, home renovations – Home equity is the key.
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!