Lenders tough on self-em­ployed

Can be dif­fi­cult se­cur­ing fi­nanc­ing


Cameron Klem, a busi­ness owner in the con­struc­tion in­dus­try, is look­ing to sell his home in Ed­mon­ton and buy a new one closer to the school his fi­ancee, a teacher, has been trans­ferred to.

But de­spite a solid credit score, “huge rev­enue’’ and hav­ing been in busi­ness for seven years, Klem is hav­ing trou­ble se­cur­ing a mort­gage.

“It’s a pain,’’ says Klem. “It makes me ask my­self if be­ing self- em­ployed is even re­ally worth it when you have to go through this much trou­ble.’’

Ex­perts say lenders have be­come more strin­gent when it comes to pro­vid­ing mort­gages to the self- em­ployed, which could leave busi­ness own­ers shelling out more money to the tax­man in or­der to prove their in­comes.

“Rule changes over the past six or seven years have dra­mat­i­cally lim­ited the abil­ity of self- em­ployed peo­ple to get mort­gages,’’ says Chad Oy­henart, a Van­cou­ver- based mort­gage bro­ker at Do­min­ion Lend­ing Cen­tres.

“It’s be­come quite a bit tougher on them.’’

Oy­henart says lenders are tight­en­ing the rules be­cause of mount­ing fears that the coun­try’s hous­ing mar­ket is over­val­ued.

“They just want to make sure that they’re not putting Cana­di­ans into sit­u­a­tions that they can’t get out of, so that we don’t end up be­ing the U. S.,’’ Oy­henart said, re­fer­ring to the U.S. sub­prime-mort­gage cri­sis of 2008 that saw a slew of mort­gage de­faults and fore­clo­sures as hous­ing prices crashed.

Jeff Mark, co-founder of bro­ker Spin Mort­gage, says pre­vi­ous reg­u­la­tions were sim­ply too loose.

“There were prob­a­bly a lot of bor­row­ers and bro­kers alike abus­ing the sys­tem, and prob­a­bly de­faults too, I would imag­ine,’’ says Mark.

The rule- tight­en­ing comes at a time when the num­ber of Cana­di­ans work­ing for them­selves is steadily on the rise, grow­ing to roughly 2.7 mil­lion in 2014, ac­cord­ing to Sta­tis­tics Canada. That’s an in­crease of more than 10 per cent over the past decade.

Oy­henart says self-em­ployed mort­gage bor­row­ers are be­ing re­quired to put down larger down pay­ments, show more doc­u­men­ta­tion to prove their busi­nesses are sound and have ex­cep­tional credit scores.

A cer­tifi­cate of in­cor­po­ra­tion, three years of fi­nan­cial re­ports pre­pared by an ac­coun­tant and two years of per­sonal tax re­turns are typ­i­cally re­quired.

And it isn’t just the big banks that are tight­en­ing their purse strings, Oy­henart adds.

“We’re even see­ing credit unions take on some ad­di­tional reg­u­la­tion changes as well.’’

Stricter rules could force bor­row­ers who run their own busi­nesses to write off fewer ex­penses or pay them­selves higher in­comes in or­der to demon­strate their abil­ity to meet mort­gage obli­ga­tions, says Mark. That could lead to larger tax obli­ga­tions, he adds.

“There is an in­cen­tive to write your in­come down to re­duce your taxes down when you’re self- em­ployed,’’ says Mark.

“But if peo­ple are plan­ning a pur­chase, and plan­ning to take on a mort­gage, they might have to re­port more in­come for a few years.’’

There could be some ways around the greater tax bur­den, says Oy­henart.

“If you’re the owner of an in­cor­po­rated com­pany you can pay your­self div­i­dend in­come, so your per­sonal taxes are lower, but at least it’s giv­ing you in­come on pa­per that looks to be higher,’’ he says.

Ex­perts say it all comes down to proper plan­ning.

“It’s now got to be a two- or a three- year plan for self- em­ployed peo­ple to get a house,’’ Oy­henart says, adding that busi­ness own­ers would need to demon­strate higher in­come on their tax re­turns for sev­eral years prior to pur­chas­ing a home.

“Rule changes over the past six or seven years have dra­mat­i­cally lim­ited the abil­ity of self- em­ployed peo­ple to get mort­gages. It’s be­come quite a bit tougher on them.” Chad Oy­henart, a Van­cou­ver-based mort­gage bro­ker

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