28 Jul

HOW TO GET A MORTGAGE WHILE BEING SELF EMPLOYED IN CANADA

General

Posted by: Brad Lockey

How to Get a Mortgage While Being Self Employed in Canada

 

There are great advantages to having business for self. There are many extremely successful business owners that live great lifestyles but don’t have to pay for medical, all because they have great tax write-offs that bring their income down to a low tax bracket. The other side of this is that these great benefits actually make these same business owners work hard to qualify for a mortgage, all because their income is significantly reduced on paper. These business owners know that there is advanced planning involved in being able to qualify for conventional financing.

According to Statistics Canada, in 2015 there were about 2.7 million people self-employed in Canada which is about 14% of the total population of the country. These statistics reflect people that are continuing on in maintaining a significant lifestyle financed by self-employment and being able to be counted as such. In other words, being self-employed is a viable way of making income. It just doesn’t fit very well in the conventional lending “box”.

In order to fit in the conventional lending “box”, there is a measure that lenders require that each mortgagee(s) (the person(s) applying for the mortgage) must meet. Some of the documents that self-employed have to provide for the lender are two most recent years of tax returns that don’t always accurately reflect the actual take-home that a self-employed person has. Tax deductions related to business often reflect meals to rental space to credit card interest, etc. The result is that the income the self-employed business owner shows on their tax return is a significantly lower figure than what they actually take home. However, the “box” requires that tax returns show the required income to justify the mortgage.

So, how does one show enough income when they are self-employed? The following points are suggestions on strategies on how to plan ahead and be prepared when you, as someone who is self-employed, are ready to move forward in arranging a mortgage for property purchase.

– The easiest way to plan is to write off fewer expenses in the two years leading up to the property purchase. Yes, this means you will pay more personal taxes. However, your income will be higher which will easily qualify you for the mortgage amount that you are looking for.

– Set your finances up through a certified accountant. Many lenders want to see self-employed income submitted through a professional rather than doing it yourself. The truth is that the time that you spend doing your own taxes will not be as efficient both financially and time wise as a professional. A certified accountant knows what to look for and has enough experience to understand the tax implications. Make sure you discuss with them what your goals are so that they can set up your taxes appropriately.

– Choose your timing carefully. If you are leaving on an extended holiday or sabbatical within the two years previous to purchasing, your two-year average income is not going to be great. Take all the time off that you want AFTER your purchase. Plan your timeline with INCOME in mind.

– Ask your Mortgage Broker about STATED INCOME. There are options with some lenders to State your income. This is based on you being in the same profession for at least two years previous to being self-employed. The lender looks at the industry and researches the mean income of someone in that same profession within a reasonable amount of time. STATED INCOME is a complicated approach to showing income. However, your Dominion Lending Centres Mortgage Professional will know what questions to ask and how to negotiate this kind of proof of income. Documents such as bank statements, showing consistent deposits, will be requested by the lender.


– BANKRUPTCY. Although some business people see bankruptcy as a viable option to get out of a bad deal and regroup, lenders generally do not like bankruptcy. Having said that, some lenders will overlook this if there has been consistent and excellent credit since the time of bankruptcy and you have been fully discharged from the bankruptcy for a specific time period. Make sure you keep ALL Bankruptcy papers easily available along with your discharge papers.


– Be prepared for higher interest rates. Lenders offer discounted rates to those that fit in the “box”. Those that are not conventional are seen as a risk and, therefore, are applied to a higher interest rate. There also could be lender fees attached to the mortgage.


– Offer a larger down payment. Lenders are somewhat handcuffed to the insurer when there is less than 20% down payment on a property purchase. But if you offer more than 20% down payment, depending on the lender, their flexibility increases and it is up to the lender or even the branch if they want to take you on as a client.


– As a last resort, you can do private financing. Even though it is an expensive option, it could result in the mortgage you are looking for. Rates are higher and there will be lender/brokerage fees. However, you could be in a private mortgage for 12 months or even less, whereby giving yourself time to improve your credit (if need be) or topping off a two year self-employed period to set yourself up to show STATED INCOME to the lender. The whole point of private financing is to use it as a short term solution for a long term plan.

Being self-employed does not mean that you have to show enough income on your T1 General in order to qualify for a mortgage. There are many factors involved in showing income when you are self-employed. And every lender has different guidelines as to how they view self-employment. If you are self-employed, plan accordingly and make sure you are well set up to show that the lender that you are a desirable candidate for a mortgage.

26 Jul

HOW YOU PAY YOUR MORTGAGE PAYMENTS MATTER

General

Posted by: Brad Lockey

Aside from paying a regular monthly mortgage payment there are other choices you’ll be presented with when approved for a mortgage. This article will explain the differences and benefits of changing your payment schedule.

The goal is to pay down your mortgage as quickly as possible and save on interest. The longer it takes to pay down the more interest you’ll end up paying in the end. You’ll soon discover how choosing an accelerated payment is the best way to go.

Typical mortgage re-payment options:

Monthly: Your typical payment. With this option your payment will be the least amount and the mortgage will be re-paid the slowest. This may be more comfortable for some people as its only one payment a month to think about and plan for.

Bi-Weekly: Your 12 Monthly payments divided by 26. You would pay a payment every 2 weeks for a total of 26 payments per year.

Accelerated Bi-weekly: Your monthly payment divided by 2. This way you end up paying 2 extra payments a year the same as paying 13 monthly payments per annum.

Semi-Monthly: Making payments twice a month for a total of 24 payments a year. This will not help to pay your mortgage off any sooner than regular monthly payments.

Weekly: Taking your monthly payments for the year and dividing by 52 weeks. This will not pay down your mortgage any sooner.

Accelerated Weekly: Taking your monthly payment and dividing it by 4. You’ll end up paying the equivalent of 13 monthly payments in one year.

Here are some examples using a $250,000 mortgage at 2.44% over 5 year term, compounding semi-annually with a 25 year amortization.

You can see how choosing the accelerated option pays your balance down a lot faster than regular payments.

 

If you would like more information on how you can save on your mortgage payments, contact a mortgage professional at Dominion Lending Centres.

Payment Matters

19 Jul

IMPROVE OR MOVE?

General

Posted by: Brad Lockey

This vs That 4 Improve or Move

This is the great debate around many household dinner tables nowadays: improve or move? With all the attention the real estate market is getting these days in the local and national media, I’m surprised everybody isn’t cashing in, selling and moving. Everybody who owns real estate is holding their very own lottery ticket, each with a slightly different purse.

Sell your home for lots of cash and buy new…what could be easier! There is definitely something to be said about buying new and ‘shiny’ with a warranty. It’s glamorous, it’s easy and it makes for great Facebook posts.

Heck, on the flipside, posting before-and-after pictures of a renovation could be more impactful. You could even use the platform as a confirmation tool with picking wall colors, countertop material or even layout.

You don’t have to sell to win the lottery. The equity in your home could also be viewed as the lottery proceeds. In my opinion is there isn’t enough thought put into staying in the current home and improving the living space. Bear in mind, there are valid reasons why you have lived there so long: an established network of friends, close to school, convenience for day-to-day amenities, access to work, beautiful big back yard (new homes have small yards nowadays), family activities, kids’ sporting programs…the reasons are endless to stay…Bu-u-u-ut one could say there are many reasons for moving too.

My only intention for this blog post is to create questions and have you think, is improving or moving the best option? Don’t always jump at the dangling carrot; there could be other options.

One could argue that deciding to sell and move is the easier of the two. All that you need to do is to call your trusted Realtor and suddenly within 4 to 9 days your home is sold. But is that the more financially sound choice?

Here are the costs to consider when selling your home.

* Approx Realtor fees: 3.50% on the 1st $100K, 1.15% on the balance
* Potential mortgage penalty: Based on the balance, or it can be ported
* Lawyer fees: $2,000 (sell and buy)
* Property repairs: TBD; major repairs or just minor touch ups?
* Movers: Professional movers $2,500 or friends/family
* Inspection: $400-500 buying new property
* Appraisal: $300 buying new property with 20% down or more
* Property Transfer Tax: 1% on the first $200K & 2% on the remaining bal. (purchase)
* Mortgage payment: Difference between mortgage payments (old and new) is a cost
* GST: Are you buying a brand new home?

The other side to the equation is staying in your current home and making it better; more livable, shiny, new, fresh…Facebook worthy!

Here are the costs to consider when improving or renovating your home. This scenario makes the assumption that you will be accessing your equity to improve your home.

* Appraisal: $300; to determine market value for equity leveraging
* Mortgage payment: What is the overall increase per month with the additional funds?
* Permits/Plans: Are renos structure or surface? New floors, new paint etc…
* Product to be used: Cost to purchase new flooring, paint etc…
* Demolition: Cost of disposing of the materials correctly.
* Installation: Can you do it or do you need to hire a contractor?

Both scenarios create disruptions in life. Which one makes more sense for you and your family? Moving can have long-term effects, whereas improving is a short-term impact with living in a construction zone.

Either of the options is a great journey. Don’t focus on the destination. Make sure you consult with your Dominion Lending Centres Mortgage Broker first to consider all the costs and qualifying ramifications. The lending landscape is constantly changing; don’t assume you will qualify for a mortgage today because you qualified for one 5, 10, 15, 20…years ago.

18 Jul

WHAT IS MORTGAGE DEFAULT INSURANCE?

General

Posted by: Brad Lockey

What Is Mortgage Default Insurance?

One cost that can be overlooked by home buyers is mortgage default insurance.

So, what exactly is mortgage default insurance and why do you need it?

If you’re buying an owner-occupied home with less than 20% down payment, you are required to purchase mortgage default insurance in order to arrange your financing.  When buying a rental property, some lenders require you to purchase this insurance if you put down less than 35% towards your purchase.

As real estate values in Metro Vancouver continue to soar, many home buyers, especially first time home buyers, often have less than 20% of the purchase price available as a down payment.  The average price of a new home is now well above $500,000 meaning a 20% down payment can easily exceed $100,000.  This is a lot of money for most people and it’s understandable why many fall short of this 20% down payment.

Conventional vs. High-Ratio Mortgage

Borrowers who have a payment of 20% qualify for conventional mortgage financing.  For your lender this means the property has sufficient equity to protect the lender from any shortfall should you, the borrower, default on your mortgage.  Having a higher down payment also means you have more “skin in the game”, making it less likely you’d default and walk away.

A high-ratio mortgage means the borrower has anywhere from 5% – 19.99% towards their down payment.  Financing can still be obtained but in this case you will be required to purchase mortgage default insurance.  The higher loan-to-value (LTV) percentage of a high-ratio mortgage means you have less equity at stake and thus a higher potential of default.

The lender wants to protect their investment and they do this through mortgage default insurance.  This is an additional cost to the borrower but it also makes it possible for those with limited savings, particularly first time homebuyers, to get into the market sooner.

Mortgage Default Insurance Providers

There are three major insurers in Canada.  The Canadian Mortgage & Housing Corporation (CMHC) is a Crown Corporation and the largest provider of mortgage default insurance in Canada.Genworth Canada and Canada Guaranty also provide this type of insurance to the lenders.

Your lender or financial institution will arrange and pay for your insurance, but this cost is typically passed on to the borrower and is incorporated directly into your mortgage payments.   Insurance premiums are tiered and based on the amount borrowed and the size of your down payment.

To see a detailed list of premiums visit CMHC’s site to see how much it costs.

Thanks for reading and feel free to contact Dominion Lending Centres with any questions.

6 Jul

What is a credit report and why is it necessary?

General

Posted by: Brad Lockey

What is a credit report and why is it necessary?

What is a credit report and why is it necessary?
It’s easy, it provides proof of your creditworthiness.
Plain and simple!

In this day and age, it’s rare to find someone who doesn’t have some form of credit. This can include credit cards, personal loans, lines of credit, car loans,  student loans, mortgages and more. Anything that reports to one or both of the main credit reporting agencies in Canada, Equifax and TransUnion.

What this basically says is what your credit history and repayment habits are like. It reports when you paid on time, late or didn’t pay at all and you now have a collections company after you. It also reports when a creditor writes off a debt along with when there has been a bankruptcy or a consumer proposal. They also provide information on how well you have made your mortgage payments.

Your credit report will also show how much of your available credit has been utilized. So if the limit on your credit card is $2,000 and you owe $1,999, it gives the impression that you might be tight for funds and are using credit to keep afloat. Having several maxed out and over the limit debts can be a warning sign to credit issuers, along with mortgage lenders.

All this info creates scores which rate your credit worthiness. The higher the score, the better, especially when you are asking to borrow the most money you will probably ever ask to borrow – a mortgage on a house!

We have several categories of lending institutions. The best interest rates and terms are found with prime lending institutions such as the banks, monoline lenders (available through mortgage specialists), credit unions, etc. These options are usually only available to those with the best credit ratings.

There are lenders who will grant mortgages to those who have experienced credit challenges. Rates and terms are higher, often brokerage and lender fees apply. These “subprime” lenders also offer opportunities designed to assist those having difficulties to get out of the corner and improve their situation. Most of the time, these lenders are used in the short term until the borrower qualifies with prime lenders with better rates and terms.

There are circumstances where private lenders are also utilized. A good mortgage specialist will be able to assess the situation and tell you when this is necessary.

Of course, you will be notified well in advance anytime a fee will be charged by the broker or the lender.

Here’s what makes up your credit score and what impact they have on the bottom line. Payment History (how well you paid), Credit Debts (how many debts you have and how much they are utilized), Age of accounts (how long you’ve had these debts, the longer the better), Type of credit (they all impact differently, Credit Enquires, (are you a shopper spending lots of money, or in trouble?).

To find out how long negative comments stay on your credit bureau, check out this page on the Financial Consumer Agency of Canada’s website.

The biggest threats to your credit score are payments later than 30 days, maxed out credit cards, collections, proposals and bankruptcies.

The moral of the story….. Keep a close eye on those debts, keep payments up to date, don’t overextend yourself, and if you are having issues, talk with an advisor before it gets out of hand. There are many ways to prevent a credit rating breakdown, we here at Dominion Lending Centres can help.