New CMHC Self Employed Program Makes It Easier For Self Employed Borrowers 2018
New CMHC Self Employed Program Makes It Easier For Self Employed Borrowers
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.