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Income, income, INCOME. Whether you’re buying or refinancing, personal income is a KEY factor in qualifying for a residential mortgage in Canada today.
And it’s not just how much money you earn: it’s the form in which you earn it, how long you’ve earned it that way, and how easy it is for a lender to verify. The more of those boxes you tick, the better the rate and terms you get – whether it seems fair or not.
With many clients nowadays, I am a messenger wearing a Kevlar vest.
I have to tell them that traditional mortgage lenders won’t care if:
you’re getting a promotion this Fall.
you sold your Bitcoin at the very top.
your Biggest Commission Cheque Ever is coming at month-end.
your new business is growing in leaps and bounds.
you’re writing off expenses like crazy, because tax (obviously).
your net worth is virtually as big as this new mortgage will be.
What traditional mortgage lenders DO like is the ability to go back two or more years and reliably track the same style of income, and be able to verify it through second and third parties. These policies create a “pecking order” of income types. Here are a few.
Arguably at the top of the income food chain is the (long-term) salaried employee. A lender is in a happy place whenever they can phone an HR person at an arms-length employer who wrote you a job letter; review your recent pay stub, which shows the same semi-monthly numbers like clockwork; and reconcile your pay with a year-end T4 slip – a copy of which has been submitted by your employer to Revenue Canada. With that T4 as an additional check, the lender figures if you’re lying to them, you’d be lying to the CRA as well. That’s why some mortgage lenders are so comfortable with this form of income, they may actually accept the wage of a person just out of (or still in!) a probation period.
Pensioners are gold, too. Whether that income’s from an employer’s plan or even better a government indexed pension like OAS or CPP, lenders can virtually set their watches to it – and it’s easily verifiable through the disbursing pension fund (and their T-slips) or the Canadian government itself.
Next in line is the variable-income crowd. These are the hourly workers, the part-timers, the bonus/commission earners with a base salary. There can be up and down years; but as long as the global amounts earned from the same employer(s) have been reported and tax-filed/deducted for two years, lenders will look at the two-year average or a similar calculation. If this is you, look at “Line 150” of your last two annual Notices of Assessment: that, in the eyes of lenders, is your ballpark employment income.
Further along is the 100% commissioned salesperson. As long as you’ve been selling the same product/service for two tax years or more (and have the annual T4A slips to show for it), some traditional lenders will consider your sales prowess. But take note of a few things: I said some, not most, traditional lenders. And slump or streak – if there are big differences between the past two tax years, those lenders may be more skeptical and conservative when it comes to your borrowing power. Most importantly, recognize that they will ONLY take into account what you’ve earned and filed/paid taxes on in the PAST, not how your sales are looking so far this year, or for next month.
We then wander into the world of the self-employed. Say your business is incorporated and you pay yourself dividends and/or a salary. So long as that business and income stream is at least two (tax) years old or more and it’s reported and tax-paid, it can be considered. Same goes for a sole proprietor who has reported gross income from business activities, then a net income after deductible expenses. This is all best verified by accountant-prepared, corporate and/or personal tax returns; but big-picture it’s still your word, not an employer’s. Less verifiable.
One potential pitfall for self-employed borrowers is how long you’ve been in business for yourself. If you’ve been on your own for less than two years, traditional mortgage lenders will NOT consider you (exceptions may be considered if you happen to have been employed in the same industry for several years beforehand).
But the BIG problem arises for the self-employed borrower if their personal NET income is too low, because net income is what traditional lenders will use to qualify you, subject to some minor allowable tweaks. So whether you kept your earnings in your company and paid yourself a very modest dividend, or your sole proprietorship expensed net income to oblivion, you may be walking out of your bank feeling unpleasantly surprised. Imagine my business-owner client’s frustration when he realized his salaried manager qualified for a bigger traditional mortgage than HIM!
To the dismay of the self-employed borrower, Canadian tax planning and mortgage planning are diametrically opposed. As a colleague of mine once said on the matter: “Which do you want? Low income taxes? Or a low mortgage rate?” More than ever given the recent mortgage rule changes, self-employed borrowers can’t have both. I’ll talk about that more another time.
There’s a smorgasbord of other income types that lenders may consider: disability, spousal/child support, certain investment income, seasonal/EI and more. And of course there’s the rental income from your basement suite or a stand-alone investment property; but that’s also for another day.
You’ll probably get a hard NO from everyone if your “income” comes from ineligible sources such as capital gains, shareholder loans (to be) repaid by your company, retained earnings in your company, or winnings from gambling. Income has to be sustainable, reliable and verifiable. Did you tell the CRA about all those cash tips you earned as a server? If not, you can’t take credit for them as income. At least with a traditional lender…
Finally, for the borrower showing little to NO qualifying income, there are also solutions – from the non-traditional sector.
For a rapidly growing portion of the Canadian population – and my clientele – what people actually earn, and what traditional mortgage lenders will recognize as qualifying income, are two increasingly different numbers. Luckily in response, a number of legitimate alternative and private mortgage lenders have entered the fray to service this chunk of the market.
Many are actually divisions of Canadian chartered banks and other brand-name mortgage lenders, as well as specific products offered by local credit unions. Their qualification policies connect the dots between reported income and real income, while also offering greater flexibility on credit and other criteria…including the recently self-employed.
And while they command higher rates and lending fees to compensate for that flexibility, alternative mortgage lenders are becoming an easier and easier reality for me to explain. In fact, I have relied on alternative lenders myself.
There are only a couple or so lines on your entire tax return that traditional mortgage lenders care about. Alternative mortgage lenders can read between them.
Stay tuned for a tour through Canada’s current mortgage lending ecosystem – traditional and beyond.
In the meantime, find me online to start a discussion about your or your client’s unique mortgage needs.
Up In Smoke (Almost): Music School Owner Buys Ex-Grow-Op
Just after Christmas, a friend of mine confided in me that his colleague had found the perfect home to live and work in, but was having a tough time buying it. I agreed to try and help out.
“You’re the fifth mortgage broker I’ve spoken to,” said the gentleman over the phone. “I don’t want to waste your time.” I listened to his story, considered it, and offered to give things one more shot. Having attempted to get approved so many times, the client readily couriered me a thick package of the usual required documents – and some unusual.
As it turns out, the client and his wife had been circling this Fraser Valley home for over three months. It had been listed in the summer, and was even price-reduced once before the listing expired. Nonetheless, the couple apparently managed to negotiate a private sale afterward – subject to them attaining financing. And finding a mortgage had been extremely tricky.
Why? Well first off, he had been “BFS” for less than two years. That’s mortgage lingo for self-employed (Business For Self). In actuality, my client had been his own boss in the same general line of work for many years as a music teacher. His new venture, however – a growing online music school – was just over eighteen months old. I work with many lenders that are sympathetic to self-employed homebuyers – including ones, like my client, who apply for mortgages on the basis of their “Stated” income (their real, gross monthly income) as opposed to their “Reported” income (their net taxable income after deductible expenses are subtracted, more on that another time). Nonetheless, self-employment for less than the magic minimum tenure of two years caused a lot of those usually sympathetic doors to close.
Strike two? The house was once a condemned marijuana grow-op. The previous owner had actually purchased the house in its condemned state, then painstakingly walked through the half-year process of remediating it and getting it signed off by the municipal authorities for safe and healthy re-occupancy. I had 28 pages of documents diarizing it. But despite having been fixed by the book, and despite the previous owner having lived in it with his young family for the ensuing 10 years incident-free, the house still had enough stigma attached to it for almost all mortgage lenders to pass.
There are a handful of conventional lenders who, in your author’s personal opinion, “see the light” when it comes to how comprehensively an ex-grow-op can be cleaned up; however, the dilemma was that my client’s new line of work was too new. I argued that he was in the same general industry forever; that he had less than half a year to go until the magic 2-year tenure; that he had diligently saved up a six-figure down payment; and that his credit score was sensational. Lots of “no thank you’s.”
Finally, I came up with a solution. A well-known Mortgage Investment Corporation (MIC) in Vancouver agreed to finance the purchase. Their rate and terms were not as competitive as that of a traditional bank or credit union’s mortgage. Nonetheless, the loan had the right features: It was interest-only payments for a period, which would assist in my client’s cash flow while his business grew. Most appealing to him, it was structured such that the first payment not be due for three months. This gave my client enough time to vacate the commercial space he had been renting for years, and move his instruments and equipment into his new home studio. Paying interest-only to begin is not ideal; but my client now owned the home/studio he had coveted for months (and he had been throwing commercial rent payments out the window anyway!). Finally, the mortgage was Open, which would allow us to eventually transition to a cheaper, traditional lender penalty-free as soon as my entrepreneur could document “2 Years BFS.” We would do this in two phases, but get the place now.
When that stack of documents first arrived at my office, my first reaction was to empathize with the previous mortgage professionals who’d tried this purchase on. Easier, I guess, for them to pass and move onto more academic files. But challenges like these get my wheels spinning; I enjoy them immensely. And as I leafed through the package I realized: this guy is extremely organized and solid. Upshot? Not only was I afforded the opportunity to start a long-term relationship with a fascinating and high-quality client – I also had the satisfaction of phoning him with the good news that I had found a way. It was a real pleasure working with him.
This purchase had almost gone to pot; so needless to say, the good news was music to his ears. Sorry, I couldn’t resist.
RENEWAL RANCOR: The Games Banks Play
Five weeks ago, a client of mine contacted me – knowing that her mortgage was up for renewal on December 15, and wanting to explore her alternatives.
Her existing 5-year closed mortgage was fixed at 3.49% and she knew rates were now lower, regardless of a recent climb. I arranged for her to switch at maturity to a new institution, at a 5-year fixed rate of 2.69%. Significant savings. Hurrah!
But here’s the rub: my client would not have reached out five weeks ago if she didn’t realize ON HER OWN ACCORD that her mortgage was maturing on December 15. Between October 22 and last week when the file was completed, she and I were acting on her initiative…NOT because she had received a renewal letter from her incumbent bank.
In fact, my client didn’t receive her old bank’s renewal letter in the mail until…yesterday.
And while the letter was dated November 10, it was mailed from Vancouver (or for the benefit of the doubt, perhaps Toronto) and didn’t hit her postbox until November 24.
November 24 is exactly 21 days before December 15, the end of the existing term – and 21 days is the federally regulated minimum lead-time that you as a borrower are entitled to receive renewal notification from a financial institution.
Coincidence? That’s not all.
Look what they offered her for a 5-year fixed rate:
Not only did this bank’s renewal notice get to my client at the latest legally possible date, but they offered her a renewal rate HIGHER than her previous term. And in THIS market, that rate’s not even on the right planet.
A stellar client, who makes five years of payments like clockwork – then gets treated like this.
I have a word for that. Insulting. Almost as insulting as the bank’s subsequent pleas and offers to her, to stay.
Had my client not been alert enough to start exploring with me early, she may have only thought about it today. And rates today are not even as good as they were two weeks ago, let alone when we organized a submission.
Worse yet, she could have just initialed the product and term of her choice and sent that letter back with no questions asked. In the context of this tale, that seems outrageous…but know this – not even half of Canadian mortgage holders negotiate different terms than those presented in their banks’ renewal documents.
That is why I always say: never, EVER, just send that letter back. In the sport of mortgages, you are a free agent at renewal. Contact me to find out if YOUR bank is playing fair.
CLICK HERE for more of my rants – and strategies – on mortgage renewals.
DIGGING OUT: Miner Consolidates Debt
A geological entrepreneur reached out to me a couple of weeks ago for help. He’d been involved for decades in the world of mineral exploration – a prevalent industry in our city that has certainly gone through its share of highs and lows.
During more recent highs (that is, before the financial crisis of 2008), my client was easily pre-qualified as a “Business For Self” borrower by a Big Five Bank, and then purchased his family a lovely house in the hills.
Then came the crash of 2008; then a brief recovery in 2011; then another big pullback that has persisted in the sector. People involved in natural resources and the junior capital markets have languished accordingly. Hug one today.
My client was no exception: maxed out credit cards, balances outstanding with the Canada Revenue Agency on both personal and corporate taxes – even unpaid property taxes. This had manifested as a bruised credit score as well. On top of that – the mounting political pressure of an outstanding loan from a business partner.
But in the midst of the maelstrom, some rays of sunshine: through thick and thin and despite having fallen behind, the household had managed to maintain relatively stable income. The family never missed a mortgage payment. And thanks to the local market, the value of – and the equity in – their home had risen dramatically in recent years.
The client had initially turned to his original bank to refinance the home, only to be declined – even for a line of credit. Many self-employed borrowers who’d purchased during the same period as my client have come to realize that federally regulated financial institutions (banks/lenders) engaged in residential mortgage underwriting have been subjected to a series of rule-tightening since the autumn of 2008. It’s therefore a much different game out there for the self-employed homeowner or purchaser – the rules of which I would be pleased to explain and navigate with you.
Nonetheless – my client’s next stop was in the office of a private lender. This was a quick conversation because the proposed facility was, politely, far too usury and complex. Double-digit interest rates are simply uncompetitive in this market given my client’s profile.
Ultimately, my first-phase solution was to arrange a “single-digit” second mortgage on the home using a well-known mortgage investment corporation (or MIC) as the lender. We did a 2-year, fixed rate loan that was open and therefore penalty-free if and whenever the client could pay off chunks. To aid in cashflow, monthly payments were designed to be interest-only in the first year, then amortizing in year #2.
The loan had a 2-year term for two reasons: first, the client felt this gave him and his spouse enough time to repair their credit and increase their income (the latter through industry recovery and/or career change); and secondly, the loan’s maturity would dovetail almost perfectly with their bank’s fixed-rate closed first mortgage. This will allow us an almost seamless entry into the second phase of my assistance: a refinancing of both mortgages at a sympathetic institution into one, competitively priced loan. The couple now know that the better they manage to recover, the larger and more competitive the lender smorgasbord may be at renewal/refinancing time.
In the meantime, relief washed over my clients as they zeroed out their consumer, government and interpersonal debts. They exit this year with room to breathe and time to contemplate their next career moves. And that is SO fulfilling for me.
My only problem now is, how can I ask great people like these for referrals or introductions to others in need?
Who on earth is going to tell their friends, “Toma Sojonky got me a great Second Mortgage?”
Ha – who knows.
But know that I’m here.
Aspects of this article have been obscured/edited to protect client identity.
Retiree Mortgage Solves Downsizing Dilemma
A retired couple recently reached out to me for assistance in downsizing from their beautiful West Vancouver house to a stunning waterfront condo 3km away.
They owned the house outright and had only given casual thought to selling the empty nest – until the apartment suddenly became available as a private sale. Such opportunities in a market as buoyant as this don’t come around all that often.
Their plan of attack was to immediately purchase the condo; then while remodeling it, to prepare for a de-cluttered and downsized move out of the house, which would then be groomed and staged for listing.
The clients had almost enough value in their portfolio of marketable securities to buy and renovate the condo outright as well, but were loathe to suffer the tax consequences of liquidating those investments – particularly given the current marketability of their principal residence (the sale of which would not be a taxable event).
So, the couple approached their private-client-group representative at their Big Five Bank for a short-term mortgage – only to be told that the institution could not help them. The banker purportedly explained to the clients that in being retired, they would not meet the bank’s income requirements to service the debt – regardless of their assets or cash flow; also, imposed regulatory restrictions precluded the bank from doing home-equity lending any longer.
The husband then approached me with the mandate of coming up with something “inventive.” As it turns out he chose that adjective carefully, because as an ex-financial services executive, he was expecting inventiveness (ie. presumably a private mortgage lender) to be relatively costly with a high interest rate and fees – but still less costly overall than triggering those investment taxes.
The next business day, I had the couple approved by another institutional lender for the home-equity loan they required to buy the condo. This lender did not qualify my clients on their income per se, but adjudicated the mortgage on the clients’ liquid net worth; the reasonability of their investment income to make the interest-only payments; the appraised value of their house and the condo; and the relative brevity of the term of the mortgage (which was open and therefore penalty-free upon the ultimate sale of the house). The upshot? The pricing of the loan was a little over half of what the clients were expecting to pay.
In parting – a message to downsizing, retired homeowners and their Realtors: if “the right place” happens to pop up before you’re ready to sell yours, call me to discuss if and how a mortgage solution like this is applicable to you or your clients. Please seek the advice of your accounting professional on all of your taxation matters.