A different tack for self-employed clients

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Brokers continue to vent their frustration over securing mortgages for self-employed clients, but are increasingly directing them to write off less of their income, among other successful strategies.

“We had a plumber who had just set up his business in 2011, after working as an apprentice up until 2010, whose 2011 claimed income wasn’t enough to satisfy lenders,” Shaun Zipursky of Dominion Lending Centres City Wide Mortgage Services told MortgageBrokerNews.ca. “When he filed his income tax for 2012, the lending institution was satisfied with the income. So for 2013, the lender was willing to finance the mortgage.”

All it took, Zipursky said, was a simple conversation with his client about declaring more income.

Often, self-employed individuals write off as much as possible, which may save them some money but will hinder their ability to secure a mortgage.

“You have to be mindful of what you’re declaring and what you’re writing off,” Zipursky said.
Another proven method has been using a benchmark to determine what a self-employed client’s income would be if they were employed in a more traditional role.

“I look at whatever industry they’re looking in and what they would normally make as a salary,” Jody Henry of Dominion Lending Centres Arrowsmith told MortgageBrokerNews.ca. “You look at others in the industry, look at the paycheck of an employee who is employed fulltime by a company and use that as a benchmark.”

Of course, insurers pose even more challenges.

“It depends on the underwriter and the mood they’re in that day. An underwriter in a bad mood will decline it,” Henry said. “In my experience, CMHC used to be the most reasonable -- now they seem to be the least reasonable. Now I have the most success with Canada Guaranty and Genworth (for insuring mortgages for self-employed clients)."

One thing brokers are clamouring for is a dependable set underwriting guidelines for self-employed clients.

“There doesn’t seem to be any set reasonability test; it would be nice if the lenders and insurers established a guideline for self-employed people,” Henry said. “Even the insurers have their own individual guidelines, so sometimes you need to shop around to find an insurer that will back the client’s mortgage.”
 

  • JSydneyH on 2013-08-15 8:04:25 PM

    This requirement to test the income of our self-employed clients has nothing to do with their ability to pay for a mortgage - and using a year's worth of bank statements is sufficient proof of income stability. The Harper government is using the mortgage industry to collect more tax for his morally bankrupt government; I don't like it but I have no choice to comply ... for now.

    The Minister of Finance directly intervenes in a free market to threaten the country's largest insurance company and they back down. Why did Manulife cave in to the Minister? Oh yeah, he controls their regulator - OFSI.

    We need to remember this at the next federal election.

  • Vince Gaetano on 2013-08-16 7:10:14 AM

    This article lacks substance to justify the position. Any recommendation to a self-employed individual about increasing net income should come with a cost/benefit analysis.

    One needs to calculate the difference in interest cost between an A-lender rate and ALT-A rate and determine if it makes sense to increase your marginal tax rate to opt for a lower rate. In most cases, the self employed client(s) need to leave the ego at the door, pay the Alt A rate and continue to be tax efficient and minimize taxes owing to our friends in Ottawa.

    Just do the "math" and you will have your answer. Leave the politics out of the forum.

  • Lior, Mortgage Edge on 2013-08-16 9:33:58 AM

    I've definitely been able to push more closings through Genworth as far as BFS goes. The bulk of my business are self-employed so you go with what works. It helps that the underwriter working on my files used to work for Genworth and knows the system to get applications approved... you know who you are and THANK YOU!

    I agree with Vince, there's a lot more to consider than simply asking individuals to declare more income. Given that self-employed individuals are scrutinized more when applying for a mortgage compared to a few years ago, my advice to these people is get the documents ready up front. Don't show up at your broker's office with just a mortgage application. NOAs, T1 Gens, business financials are key to speeding up response time. Make sure to have them ready when you apply.

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