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03/05/2010 10:00:00 AM
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Self-employed Canadians have always had a harder time getting approved for a mortgage due to a higher-risk borrower profile. As of April 9, getting a mortgage became even more difficult for business-for-self clients due to new CMHC rules that are receiving mixed reviews from the mortgage broker community. The new rules change a number of things. First off, self employed borrowers with more than three years in the same business, as well as commissioned-income borrowers, are now required to provide traditional proof of income (or "third-party validation") to qualify for a loan.
Traditional income validation is available through documents like financial statements, contracts and T4s. The CMHC said the rule changes will ensure that self-employed borrowers with third-party validation will benefit from a lower premium. Those who have recently become selfemployed and don't have third-party validation can still apply for a mortgage, but have to come up with a 10 per cent down payment instead of five per cent. Refinancing will also be cut to 85 per cent loan to value instead of the previous 90 per cent.
The decreased likelihood of approval for recent self-employed borrowers is something Vancouver-based Verico broker Mark Fidgett has a problem with.
"I don't think this was a good decision," said Fidgett, who runs Notapennydown.com. He added that if the new guidelines were actually beneficial, they should have been introduced a long time ago. "It doesn't make sense now."
The CMHC originally came out with a program for self-employed borrowers in March 2007 when it realized the notice of assessment for business owners and entrepreneurs wasn't always a true reflection of their real income.
"When the CMHC came out with this program, they advertised it by saying they understand that small businesses of Canada oil the wheel, that they help float the economy," said Fidgett. "And now they're taking it away. They're saying you can only
use [the program] in year three."
Self-employed borrowers often write off a large portion of their income for tax purposes, but the changes make such actions conflicting for those looking for loans, Fidget added.
"I'm a business owner as well, and we all pay an accountant to write off as much as possible to make our taxable income as low as possible," he said. "Our income tax is low, but on this program now, it's like you need to add everything back."
Private lenders, meanwhile, are out of the scope of the CMHC and could stand to benefit from the new rules. A private lender who wished to remain unnamed confirmed her expectation with CMP that the upcoming changes will bring more potential borrowers pushed away under the new guidelines her way. And while some brokers, such as Fidgett, have openly criticized the move by CMHC, others such as Stephen Gilmour of Dominion Lending Centres Alliances in Oshawa, Ont., were steady in
their praise.
"The more people who default on loans, the worse the market becomes," he said, noting he felt a lot of self-employed people have qualified formortgages when they shouldn't have.
"This provision for self-employed is going to put the right people in the right structure of home."
Gilmour added that the timing of the changes could be due to the struggles that the U.S. housing market continues to face.
"I don't think they made the decision based on the Canadian market - we're fine. Sales are up and listings are down, which is great," said Gilmour. "I just think they're looking at the housing situation in the U.S. and trying to prevent us from having the
same thing here." But not everyone agrees. Fidgett said he finds fault in this reasoning, questioning if the CMHC is "running scared."
"I think it's a gut-wrenched reaction to what's happened in the U.S.," he said. "I wrote on my Twitter that when the U.S.
sneezes, CMHC gets pneumonia." Fidgett said he has already had a couple clients call him in frustration, expecting that they'll no longer be able to get approval. When he called CMHC for an explanation of the rule changes, he said the reason they gave him was that too many people were abusing the system. While some recent changes already passed, such as matching listed salaries for selfemployed with those expected for such a profession in Canada were positive, Fidgett said the latest move was "off the wall" and is hoping that if enough people talk about their displeasure with the changes, the CMHC
might alter its decision.
But for others like Zoltan Padar, the owner of Mortgage Pro Ltd. in Alberta, the rule changes are barely a blip on the radar.
"The CMHC always wanted a certain kind of documentation for self-employed people anyway," Padar said. "Basically, in my mind, there's really no change. The rules and regulations haven't really changed at all." He also doubts the suggestion that private lenders will get more business due to moreself-employed borrowers being shut out.
"Private mortgages are much more expensive," he said. "People aren't going to go for it."
Latest Comments
Total:
14
comment(s)
AB Mortgage Broker on
20 May 2010 12:57 PM
It's nothing more then a tax grab! The Government needs more tax revenue and this is one way to achieve that. That's it that's all!
Edmonton Mortgage Broker on
20 May 2010 01:07 PM
It is too bad all of these changes. When we have small business and self employed spurring on and keeping our economy strong just to penalize them when they want to purchase a home. Employment letter and paystub from that company will get the employee a mortgage but they look past the person that is paying them. We have to change our mindset if we don't think that small business is what keeps this train going.
Barbara Buote on
20 May 2010 02:27 PM
My personal belief that this is a Conservative Gov't attempt
Barbara Buote on
20 May 2010 02:28 PM
My personal belief that this is a Conservative Gov't attempt
Bitter Business Owner on
20 May 2010 04:43 PM
I own a business with a 50 year track record. Several years ago I created a new profit centre within the business, but unfortunately it did not fly. Consequently, the business lost about a quarter of a million dollars over a two year period. Prior to this loss the business provided me with a six figure income. Now that the loss is two years old I'm back to a six figure income. During the two years of losses and writeoffs, I withdrew cash from shareholders loans as well as increased my personal debt load. I planned an ETO on my personal residence to consolidate personal debt to replace equity I drained out of the business, but unfortunately, using two years of personal N.O.A. shows one year of good earnings and one year of non-existent earnings, resulting in a TDS that doesn't allow me to get traditional financing.
There are many statistics about the number of new businesses that fail in their first three to five years. The amount of failure is extreme yet these entrepreneurs can do a stated income application and I cannot. I think some bureaucrat missed the boat on this one.
AB Mortgage Broker on
20 May 2010 05:13 PM
I agree with you Bitter Business Owner! They do more for themselves and their friends while in office then they do for the tax payers.
Calgary Broker on
28 May 2010 01:40 AM
Come on guys, you dont show income, you dont have any money or assets & you want to buy a home with 5% down? Maybe at 85%LTV the program has more merit. If you are writing off all your revenue to expenses, if its not reasonable expenses, Im sure Rev Can will be knocking on your door. if its reasonable then you arent making any money, simple as that. Drawing down on shareholder loans rather than pulling out management draws is easy to document if financials are in place. Losing that program wasnt a big deal, it's other lender stupidity thats more of a problem. Right now I have deals I used to have lenders rolling out the red carpet to get & couldnt pay me enough, now I have to beg someone to do the deal like it's a big exception. Hasnt anyone noticed the friggin hoops we are going thru to get solid deals done these days. Kind of ironic, BMO 2/3 weeks ago hit front pages of losing 90 million on fraud, then today they announce net profit for the quarter to $700+ million, double compared to 2009. Wonder why, maybe its called IRD. CMHC dont seem to care about banks hosing people on penalties but are forcing more Canadians there. Lenders used to care about what the field sales people(brokers) who have their fingers on the pulse have to say. Not anymore. I dont think there is such a thing as Broker Advocate anymore. I sure miss the old days!
Marjorie on
28 May 2010 11:07 AM
I agree with 'we got other things to fix'. The conservatives say government shouln't meddle, but what do they do? They arrange it so te 'big' guys can get bigger and the small ones just et a bigger hill to climb. Why is it fair for someone buying a 150 unit building to get 95% financing and the purchaser of a 4 plex only 80%? That's easy - the rich get richer and the government maek sure it's thir friends so they all get richer.
M on
08 Jun 2010 01:09 PM
Aaah People!! Don't forget about Genworth. They didn't impose the three year rule.
TMACC in Alberta on
10 Jun 2010 03:52 PM
Yeah, this one has me scratching my head. On one hand they don't want those who are not actually making money - to state their income....which makes sense. But, those who legitimately succeed in their self employment ventures, cannot write off legitimate expenses to reduce their tax bill? Why are the self employed descriminated against. Some lenders are allowing add backs, but not many...where is the common sense?
Gidia on
24 Jun 2010 03:13 PM
The BFS clients, that will likely default are the ones in the business for LESS than 3 yrs, NOT the ones that have been successfully self employed for more than 3 yrs. BFS less than 3 yrs generally do not have an accumulation of assets, as opposed to one who have successfully operated a business, knows how to manage money, expenses, etc. This new rule will and has affected the market conditions and I believe will continue to do so as the months go by. No offense to New to Canada, but they are able to purchase with 5% down,no credit history and 3mths job stability. We are punishing the BFS people that provide jobs to this country.
vittorio oliverio on
13 Jul 2010 02:56 PM
when they changed the rules it was not because of the bfs problem, no it was because the government wants bfs to pay more taxes and the best way to do this? if you want a good mortgage and you been in business for over 3 years pay your taxes claim higher income and the gov't will be happy. that is the reason. this goes the same with the new rental rules- show a positive income on your rental and pay your taxes and you can have more. you show no positive income on rental and to bad. simple as that.
if the government wanted to do a proper job. bfs should be in business for at least 3 years before you can buy a home if you want stated, at least this way you know that person can make money in his business. I have seen so many times when bfs fails in the first 3 years and they have more debts or declare bankrupt. now that is when problems starts----SO LETS KEEP IT WHAT IT REALLY IS, THE GOV'T WANTS MORE TAX MONEY, so this way if you want a mortgage start paying your taxes.
Tracy Luciani Price on
19 Aug 2010 07:27 PM
I am frankly appalled at the new rules for self employed which has effectively shut out long time business people with good credit from getting high ratio mortgages. Even GE is asking for clients to disclose their 'line 150' and if it is not high enough and most of the applications are declined. Self employeds are the backbone of our economy and they are once again being relegated to second class citizens for mortgage purposes. When I asked an GE insurer recently whether there have been an increase in defaults by self employed people he told me it was no more than the norm. Wow! And to give new self employed with no history a mortgage is just bad underwriting. Where was our industry when this ridiculous changes were made by our government to the self employeds. The guidelines are forcing self employeds people to write up their income just to qualify for a mortgage. Tax grab---You Betcha! The banks have never supported self employed and most are forced to refinance their homes to capitalize their businesses. Shame on the federal government for bringing in this punitive legislation. And the situation is even worse if you are a commissioned self employed like ourselves...where do we go for mortgages now???
Chris Richards on
19 Aug 2010 11:29 PM
Really, just a touch of irony. The BFS has trouble getting a mortgage but his/her employees don't! The BFS can write a job letter so that his 3 month hire can get a mortgage at 95% LTV, but if he doesn't have a line 150 SOL. It is tax collection tactic by the gov't.