Earlier this month CMHC (Canadian Mortgage and Housing Corporation), the federal government mortgage insurance agency announced that they will make it easier for self-employed home buyers to get a mortgage. There are new changes coming to the CMHC self-employed program, making it easier for self-employed borrowers to purchase a home with an attractive mortgage from the major banks and monoline mortgage lenders.
Since the number of self-employed Canadians are growing, currently 15% of Canada’s population is comprised of self-employed people, CMHC has made such changes to make it easier for self-employed people to buy their dream home.
What Are the New CMHC Self-Employed Mortgage Rules?
In their announcement, CMHC said there are a few factors that will be considered for insurance and lending guidelines for self-employed borrowers. Some of the factors that will be considered relate to self-employed borrowers who have been in business for less than two years, which is currently the minimum requirement for self-employed borrowers.
CMHC announced some factors that they will consider for self-employed borrowers less than two years include:
- People who buy a business that is currently established
- Self-employed borrowers who have cash savings
- Future potential earnings of the business
- Past education and training
In the past, they’ve considered approving such criteria as long as there was reasonable justification of their situation.
Supporting Documents For Self-Employed Borrowers
The CMHC Self-Employed Program will accept a wider range of documentation to support self-employed income and employment for qualifying self-employed home buyers for a mortgage.
The list of documents that will be considered for self-employed borrowers will include:
- Notice of Assessment supported with T1 General Tax Return Form
- Canada Revenue Agency Proof Of Income Statement
- Form T2125 (statement of business activity or statement of professional activity)
When Will The New CMHC Rules For Self-Employed Mortgage Borrowers Come into Effect?
CMHC announced the new mortgage rules will roll out as of October 1st, 2018.Why It’s Currently Difficult For Self Employed Borrowers To Get A Mortgage Through A Bank
Self-employed borrowers have had a difficult time getting approved for a mortgage at the major Canadian Banks, such as TD Canada Trust, Scotiabank, CIBC, Bank of Montreal, Royal Bank etc, as the mortgage guidelines require for self-employed borrowers to qualify based on the average of their last two years Notice of Assessment income tax filing, line 150 total income. For most self-employed people, this made it nearly impossible to get approved for a mortgage based on today’s home values as self-employed business owners have expenses to operating their business, and in many cases have significant write-offs to their gross income, which brings their net income to a much lower reported income amount.
For example: A self-employed construction company who may generate $200,000 per year in business revenue, it may cost such a business approximately $130,000 to $150,000 in expenses for things such as labour, material, employees, etc. Although they may generate $200,000 in revenue, this isn’t their actual income, as there is a cost the self-employed individual has for operating their business. These expenses are write offs against their gross business revenue, making their take-home income much lower.
How Are Self-Employed Home Buyers Currently Getting A Mortgage?
For the past few years self-employed home buyers have been turning to alternative lenders such as Home Trust Company and Equitable Bank, as they take a more common sense approach to lending. Alternative lenders don’t require the standard documentation that banks require, such as Notice of Assessment, T1 Generals, etc to qualify.
To qualify for a mortgage with an alternative lender, a self-employed home buyer or home owner would be qualified using their business bank statement history, to validate their income, and show they have sufficient cash-flow to support the mortgage payments along with their other expenses and debts reporting to their credit bureau.
For more details click here to see self-employed mortgage program guidelines.