Self-employed Home Ownership

July 2nd, 2011

I’ve run across this topic recently. There are two minds of the people I meet. The first group thinks banks are stupid and have too many rules (I don’t disagree or say much of anything at this point) and that in their view they will never get mortgage or a home to call their own, unless their business flourishes and they pay cash.

The other group, also dislike the banks (I don’t disuade them of this idea either), but see them as an necessary evil in order to get into the real estate game. They accept the talking down to or general condescending attitude for not having a salaried job and “steady” income, even though most of these business owners probably make triple or quadruple the bank employee makes in a year.

To all you self-employed people out there, don’t take this garbage. There are special programs out there just for you, as the majority of lenders recognize that without you the small business owner this country wouldn’t be what it is today. You are the backbone of our economy. The lenders understand that you want to buy a house. Yes, you need to supply a little more documentation if you want to fit into the “salaried” mold that the banks prefer and absolute rock bottom rates. But that’s really the only major difference.

In the mortgage industry there are two names or categories (depending on which lender and what they prefer to call it). We have Alt-A, which simply means you are an “A” client, but the lender needs to use “alternate” means of verifying your income. The other name or acronym they use is Business-for-self or BFS, which I much prefer as that’s what you are self-employed (or as I like to call myself, self-unemployed).

Each lender is slightly different in the rules or “policy” the follow for BFS clients. Such as some only go to 90% loan to value (LTV), others 95%  for the mortgage. Some allow second homes, some don’t. Some allow rental properties, some don’t. Others allow gifted downpayments.

All this to say there are options and it’s my job to figure out what you are trying to achieve and match you with a lender who will allow you to do that.

Now the REALLY cool thing lenders allow is something called “stated” income. First a little background. Many… most? OK the really tax savvy business owners… try to pay as little personal income tax as possible. To that end, they are either pay themselves via dividends or split incomes with family members, etc. etc.  The end result is their declared or taxable income is very low. Zero is bad and raises flags with CRA, so they earn and declare as little as possible.

This is great from a tax point of view, but if you are trying to buy a house… not so much. To overcome this “problem” of low income and to prevent having to get corporations to purchase houses and all the complexities involved with that, we have a category of products called “stated income”. The idea is that YOU as a business owner know how much you really earn or at least how much mortgage you can afford to pay. As long as this “salary” figure is within reason, then we simply “state” on the mortgage application that you “earn” X number of dollars (gross) in order to qualify for the mortgage.

Some say, “isn’t that like lying?” Technically yes, it is lying in some ways, but then you seem to be OK with telling CRA that what you earn is significantly less in order to pay less tax. But because you are educated and know the tax rules, why not apply the same logic and know the mortgage lending rules in order to buy the single largest asset/expense in your life?

Think of it another way, you are already likely paying fairly high rent as you want to be near income earners of the same level as you. If you can afford a rent payment of (throwing out a number) $2000/mo, why on earth couldn’t you afford a mortgage payment of that amount? Your landlord is happy. Why wouldn’t a mortgage lender? Does your landlord look at your tax return? Why should your mortgage lender?

If you know you can afford a mortgage payment already, simply take that number and do a little math and determine what your gross annual income needs to be in order to afford that size of mortgage. That is your “stated” income.

You’ve determined the number. What documentation do you have to provide in order to qualify? Assuming you are not claiming to earn $1M as a car wash owner operating out of your garage, then you need to show you have been in business for at least 2 years (independent, third party proof) and that you don’t owe significant taxes (in proportion to your earnings). That’s it.

I’m anticipating the next question… what about the rates? I’m glad you asked. Rates will be higher, naturally, the lenders are taking a risk, not just on you but your business as well. The good news is the premium isn’t all that much. I’ve seen rates anywhere from almost on par with lowest discounted rates (i.e. within 0.10%) to as much as 2% higher as not everything lined up perfectly (shy of 2 years, credit below average, gap in income, previous bankrupt, etc. etc.).

If you are a business owner, yes definitely you can get a mortgage. Don’t show enough income on your tax return? Not a problem, we have a solution for you too. And PLEASE try and stay away from the narrow minded thinking of the banks. Just say “no”.

One response to “Self-employed Home Ownership”

  1. walshsurvey says:

    Great Post, I hope it helps someone into a house!!