Many mortgage lenders – particularly the big five banks – are tightening the purse strings when it comes to the self-employed, forcing brokers to better educate their clients.
“From the lender’s point of view, they want to make sure they’re offering a mortgage to someone who is financially secure and who can make the payment on the mortgage, and you can’t really fault them,” says Kelly Hudson, a mortgage expert at Dominion Lending Centres in Vancouver. “People who are self-employed are a little disillusioned at this time because of what they have to prove – and especially because five years ago it wasn’t the same.”
Indeed, lenders are moving to better protect themselves from defaulted mortgages and are requiring more paperwork from the self-employed to ensure they’ll be able to make payments.
“A-side lenders are getting more particular about proving everything: employment, income, what you have in the bank,” Hudson says. “Part of that is dictated by the Canadian government, (but) the main group of people being challenged is the self-employed, who have more and more paperwork to do to show where the money is coming from.
“People who are employed have to provide a letter of employment, show they’ve got the deposit in the bank, and it’s been there for more than three months.”
It’s not just banks demanding more paperwork – monolines, too, are looking for more detailed accounts of a self-employed client’s income.
“As an example, one monoline lender has a stated income document that the client can fill in, and that used to suffice, in conjunction with business registration or articles of incorporation,” says Jerome Trail, a Toronto-based mortgage broker at GreedyMortgage.com. “Today, they have to submit that, plus notice of assessment, plus bank statements, if the notice of assessment doesn’t qualify on a ratio basis.”
For his part, Trail says it has become increasingly important to educate self-employed clients about the uphill battle they’ll face in balancing tax obligations with showing income.
“When I sit down with clients that are self-employed, I declare that I’m in the same boat that they are,” he says. “Anyone who is self-employed wants to show minimal income to avoid our tax obligation, but at the same time we want to show enough income so a lender is not afraid to give us some borrowing power.”
With files from Jennifer Paterson.