On July 19th, 2018, CMHC announced changes for self-employed borrowers qualifications. These changes will make it easier for self-employed Canadians to qualify for a mortgage.
In the announcement, CMHC declared “Self-employed Canadians represent a significant part of the Canadian workforce. These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.” – Romy Bowers, Chief Commerical Officer, CMHC.
Traditionally, self-employed borrowers often write off as many expenses as possible. They do this to shrink the amount of income taxes they pay each year. While this strategy is great for tax purposes, it often makes mortgage qualifications difficult.
Plain and simple; self-employed borrowers don’t look good on paper.
SELF-EMPLOYED INCOME GUIDELINES
Current policy says CMHC wants to see 2-years of established business income to form an average income. The new rules allow for more flexibility and income can now be accepted by:
- Acquiring an established business
- Sufficient cash reserves
- Predictable earnings (signed contracts)
- Previous work (same industry for years but a newly formed business)
- Borrower’s credit history of managing debt
For example, a borrower has been a plumber for 15 years as an employee. They decided to form their own company and contract themselves back to work for their previous employer. They also have the ability to pick up additional contracts. Under previous guidelines, they would have to pay an interest rate premium of 1% or higher due to a lack of a 2-year income history.
To assist with assessing self-employed borrowers, the following documentation will now be acceptable to qualify income:
- Previous employment documentation, if the same industry
- Recent bank statements
- Business documentation
- Signed contracts (future income)
Self-employed sole-proprietors will now be allowed to submit their “Statement of Business Activities” from their T1 General tax return. Certain write-offs will be “added back” to their income. CMHC has realized that these write-offs are strictly for tax saving purposes and are not a reduction of actual income. This could mean a significant increase in income and buying power.
After years of Government claw-backs and conservative policies, its refreshing to see some loosening of guidelines. The noted policy changes for self-employed borrowers take place October 1st, 2018.
As always, talk to your Mortgage Specialist at Dominion Lending Centres. We are available anytime, anywhere.