Jurock.com BC Real Estate Marketplace

Self Employed? A Real Estate Investor ... A Must Read!

by Dustan  Woodhouse

Thursday, November 15, 2012

The bulk of this content is aimed at self employed clients, however much of it spills over to Real Estate investors with multiple properties as they too are subject to greater documents disclosure and inspection than ever before.

However with the current trends much of what is set out below may soon apply to even the most basic of transaction with the most simplistic of scenarios.

I am often asked what is the biggest challenge prospective borrowers face these days. The answer to that question is 'knowing what is required'.

I do not simply mean knowing which documents to have ready for your broker during that first meeting, instead it runs much deeper than that in particular for clients with investment properties or in particular those that are running their own business'. There are key steps that a self employed applicant needs to be taking today to ensure a smooth purchase or refinance transaction as far out as three years from now. Steps with regard to business license documentation, consideration of Dividend income, utilizing an accredited accountant to prepare not only business financials, but also their personal T1 General tax returns.

If you start a discussion with a broker or a banker about the changes to the lending guidelines over the past year you will likely be met with an eye roll and a heavy sigh, maybe even sagging shoulders. Frankly it has been extremely difficult for full time active brokers to keep up with the changes in the lending landscape – it has been just shy of impossible for the client themselves to have a clue how things have changed.

Many of these changes were not ones trumpeted in the news, such as the recent reduction in amortization for insured mortgages, rather they were quietly announced policy changes within the underwriting offices of Chartered Banks, Credit Unions, MBS (mortgage backed security) lenders, and even private lenders. All have tightened things up to some degree, most to an extreme degree.

The first sign to a client as to how things have changed is the significant increase in documentation requested for all mortgage files. The list for income confirmation for instance has grown from one or two pages, to several dozen.

Without exception we are being asked for T1 General tax returns, and in the case of a self employed applicant said T1's MUST be accountant prepared. No two ways about it.

Furthermore, these T1's are being combed over for clarity on sources of income. Have their been RRSP meltdowns, one time share sales, and are any rental properties in the mortgage application (and all properties in your personal name had best be on the application) that are not listed on the 'Statement of Real Estate Rentals' within your T1 General?

A rental with unreported income will not be allowed to have its income used for debt servicing. Thus your personal income needs to be that much strong to debt service the file in such an instance. Not a scenario that plays out well for most clients.

Where we were with (owner occupied) mortgages for self employed applicants;

Strong personal credit score and 35% down payment from your own resources?

One document;

That was it.**Maximum Mortgage as high as 2.0M in my own experience.

Where we are today with (owner occupied) mortgages for self employed applicants;

1) Chartered Banks (Following changes primarily driven by the new B20 guidelines from the OFSI - www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/sound/guidelines/b20_e.pdf )

Strong(er) personal credit score and minimum 35% down payment from your own resources?

Mandatory Documents;

Additional Documents that may be requested (in most cases much of this is typically requested)

Maximum Mortgage now effectively 1M with most Chartered Banks

2) Credit Unions (not regulated by the OFSI

Strong(er) personal credit score and minimum 35% down payment from your own resources?

Mandatory Documents;

Additional Documents that may be requested (in most cases much of this is requested)

Due to increased demand since the Banks tightening the Maximum Mortgage is now effectively 500K with most Credit Unions

3) MBS (non-bank) Lenders i.e. First National, Merix Financial, etc.

Strong(er) personal credit score and minimum 35% down payment from your own resources?

Mandatory Documents;

Additional Documents that may be requested (in most cases much of this is requested)

Due to increased demand since the Banks tightening the Maximum Mortgage is now effectively 500K with most Credit Unions.

4) Insured Business – Applications put through under CMHC, Genworth, or Canada Guarantee insured programs

Strong(er) personal credit score and minimum 10% down payment from your own resources?

Mandatory Documents;

In most instance sthe maximum property value cannot exceed 1M, and thus the maximum mortgage approval is 900K

A final footnote re Dividend Income. Most lenders treat dividend income as one time 'bonus' income and will not account for a scenario whereby you reduce your annual salary by 50% one year and replace it with the equivalent in dividend income, instead the lender sees only that your income has fallen by 50%. If Dividend income has been claimed for three tax years consistently then we can request an exception to have it allowed – however it is still an exception.

Bottom line, this is not the year to take your first dividend. Great idea tax wise, Disastrous idea Mortgage approval wise.

Being the owner of my own personal Corporation I certainly concur with my clients and their Accountants alike that this lacks logic. Arguing the point has proven fruitless, it is not something that is likely to change anytime soon and so we must work with it.

Assets – Why have I not touched on this topic? Aside from having 50K in liquid assets for each rental property in your portfolio (a condition a limited number of lenders apply) there is no significant weight put on assets.

It is not about how much you are worth, how much you own, how great your credit is, the huge retained earnings in your Corporation, the massive equity position in your properties, or how your family has never missed a payment in ten generations…it is all about Documented Line 150 personal income. That one thing is where the focus is.

Documented line 150 personal income.

Action Items



Related Site Links:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/sound/guidelines/b20_e.pdf