Mortgages getting tougher on self employed folks

CMHC is tightening the criteria needed for self-employed borrowers to get mortgage insurance, changes that will come into effect on April 9, according to Canadian Mortgage Trends.
 
Borrowers who apply under CMHC's self-employed stated income product will need a 10 per cent down payment instead of the five per cent down payment now required. These borrowers will also only be able to refinance up to 85 per cent loan to value instead of 90 per cent.

Debbie Thomas, partner and broker of record at The Mortgage Group, recently told CMP she has noticed a trend of insurance guidelines tightening for self-employed borrowers, who often write off a large portion of their income for tax purposes.

"The whole issue of reasonability has now been forced back and self-employed deals that used to be approved are not even close to being approved today," said Thomas. "It hasn't been an announcement or anything that has come out from the lenders or insurers, but it's something we've definitely noticed."

Insured Stated Income Programs Tighten Up

CMHC has felt for a while that too many people apply for stated income mortgages who shouldn’t.

Therefore, effective April 9, CMHC is adding more restrictions to its Self-Employed stated income product..

For one thing, it’s reducing the maximum allowable loan-to-value. 

Self-employed borrowers who choose to apply under this program, and not verify their income using traditional means, will have to put down 10% when purchasing a home (instead of 5% today).

Stated income applicants who wish to refinance will be limited to 85% loan-to-value (instead of 90% today).

CMHC says:

• The Self-Employed program is intended for self-employed borrowers “who have difficulty providing documentation for their current income level.” These are often people who’ve recently begun to work for themselves.


• Self-employed borrowers in the same business for over three years will no longer be eligible for approval without traditional proof of income.


• A business license, GST license, or articles of incorporation will be required to validate the applicant’s length of self-employment.


• Commissioned employees are no longer eligible for approval under the Self-Employed program.

As insurers pull back further from the stated income market, some expect uninsured lenders to eventually fill the void.  Self-employed borrowers, with hard-to document income, will then pay notably higher rates and fees as a result of using such programs.