Mortgage 101 – self employment and your income | November 2022 Part 2

In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on CityNews 95.7 and CityNews 101.1, the guys talk about self employment and your income! Here is everything you need to know about what your income looks like on paper, and how you can qualify for a mortgage and better prepare your finances for 2023.

Mortgage 101 with Clinton Wilkins & Todd Veinotte: Self employment and your income

Don’t feel like watching the video? Check out the transcript below.

Transcript:

We’re going back to the three basics of mortgage lending, starting with income

Clinton Wilkins: [00:00:00:03] November’s financial literacy month. I know we kind of,

Todd Veinotte: [00:00:02:17] We talked about it earlier.

Clinton Wilkins: [00:00:03:23] Kicked off our show with letting everyone know. It’s hard to believe it’s November, Todd. You know, Halloween seems like yesterday and, you know, the holidays are really going to be upon us. For financial literacy month this month, we’re really talking about three, we’re going to call it back to basics, core competencies of what we do here every day.

Obviously, we know buying a home is the biggest purchase of a consumer’s life. We know the mortgage is the biggest debt. We’ve talked about that lots. What we’re going to be breaking basically the rest of our show down into, we’re going to be talking about income, we’re going to be talking about assets and we’re going to be talking about credit. So, you know, there’s certainly lots of great information throughout the show.

So I really do encourage everyone to keep your dial where it is. And we’re certainly going to do a little bit of a deep dive. So we’re going to talk a little bit about income right now. And, you know, certainly lots of hot trends going on in Canada.

More and more Canadians are becoming self employed

Todd Veinotte: [00:00:54:11] Yeah. And you wanted to focus a little bit on self employment because this is, obviously self employment is probably it’s not nearly as simple as somebody coming in with a T4. This is my job, this is my record, this is my letter of employment, blah, blah. There’s a lot to this, right?

Clinton Wilkins: [00:01:09:00] Yeah. I think being self-employed is definitely more complicated and more and more Canadians are becoming self employed all the time. And I think the trend is even now, since the pandemic, people have changed the way they work. I think some people have chosen to become self employed just due to maybe their work doesn’t exist anymore. Or maybe, you know, they don’t want to work from home or maybe they don’t want to return to the office. So I think more people are becoming self employed.

And if you have not been self employed for the last three years, sometimes it is more challenging to get mortgage lending. And I think even if you have been self employed for a longer period of time, sometimes that is more challenging. I hear from so many consumers that are self employed, that are very scared of banks because they’ve been told no once or twice or ten times.

You know, I think self employment, it takes a lot of guts to be self employed and sometimes you make good decisions as a self employed person, sometimes you make bad decisions and that can impact the income that’s showing on your tax returns. It can impact your bank statements, it can impact your credit. So I think that self-employed people for me, I think are lower risk. And I’ll tell you why. I’m self employed. You’ve been self employed before, Todd.

Todd Veinotte: [00:02:21:24] Yeah.

Your income on paper when you’re self employed

Clinton Wilkins: [00:02:22:29] If I need to make more money, I can just work harder. It may take a couple of months to come, but I can certainly put in more effort and I can really up my game. And that can certainly make an impact. When somebody is on a salary, it’s fixed income, you know, you know exactly how much you have to work with every two weeks.

Clinton Wilkins: [00:02:41:19] And you know, you might get overtime or you might get a bonus. But usually people that are on a salary have pretty steady income over the year.

So because I’m self employed and because, you know, obviously we deal with a lot of self employed people, you know, we can really kind of specialise on knowing what the best solutions are. And I can tell you there’s certainly a lot of self employed people that are sole proprietors, and that’s a very common way that somebody is self employed, just because that’s kind of the easiest barrier to entry to be opening a business.

You can get a business license and you can operate under your own personal name. You don’t need maybe, you know, fancy accounting or you don’t need a corporation which can obviously cost money.

And you know, there are many customers that will become a sole proprietor because it’s very easy to just kind of turn that on. And obviously, like when you’re a sole proprietor, you have to take on a little bit of risk, Todd, because obviously everything that is you is the business and the business is you.

So we do see a lot of those customers and a lot of times, a lot of times they are personal finances and their business finances are all kind of tangled together. And we kind of need to sometimes unweave that web that has been has been made. So that certainly can be an impact.

And I think sometimes even those consumers that are sole proprietors, they’re trying to claim every single expense that they can possibly find to bring their income down.

Todd Veinotte: [00:04:13:08] Yeah.

Your taxes as a self employed Canadian

Clinton Wilkins: [00:04:14:06] Because they don’t want to pay income tax. And, you know, we’ve used kind of that old adage, you know, if you want to not pay a lot of tax, you might have to pay a higher interest rate because maybe you have to take a higher risk type lender. But there are lots of lenders out there.

And I would venture to say, Todd: It’s easier now to get a mortgage self employed than it used to be. Because there certainly are a lot more lenders that have the appetite for self employed people and there are a lot of even bank lenders that are that are very apt to work with self-employed people to make it work.

Todd Veinotte: [00:04:45:15] Why is that?

Banks are becoming more flexible for self employed people

Clinton Wilkins: [00:04:46:26] You know, I think the federal government really put a mandate out that more Canadians are becoming entrepreneurs. And I think the banks were really told to be more flexible and more accommodating to self employed people.

I’m certainly seeing it from what I do, but I think even if you are self employed and if lending maybe is a little bit more flexible now than it used to be, I still would say that you need to go to an expert that knows how to put all your pieces together and really kind of the best foot forward.

Todd Veinotte: [00:05:16:29] Yeah, but it still all it fundamentally lending comes down to risk though, does it not? And there’s an associated risk. It’s a science, right? So there’s still that component.

Clinton Wilkins: [00:05:29:02] Income is a big piece of the risk that lenders really assess whether you’re self employed or not. The one thing I can say, you know, if you’re self employed, there’s certainly things that we can do to mitigate that risk.

Todd Veinotte: [00:05:39:28] Such as?

How we can prove your income

Clinton Wilkins: [00:05:41:02] Maybe we look at your bank statements. Maybe we look at contracts that you have, maybe you’re newly self employed, but you worked in the same industry. So here’s an example, Todd: Let’s say you’re an electrician and you’ve been an electrician the last ten years, and you decide now you’re going to become self employed. I have seen lenders take a risk on someone who’s been self employed for like six months, one year. Normally that wouldn’t happen.

Normally, you need two full years of tax returns, and then we would average that income, and that’s what the lender would use. But what we’ve done in these type of cases is we’ll go back in history. Let’s look and see how much you made with your employer the last couple of years. Let’s justify the income you’re making now that it’s going to be continuing.

Todd Veinotte: [00:06:23:07] Credit?

It’s about painting the financial story

Clinton Wilkins: [00:06:25:00] Credit, obviously a big, big impact. Your assets are obviously a big, big impact. And I think cash flow is a big impact. So like, I think it’s about painting a story. It’s like, do you have contracts from customers, You have contracts from another business. How can you help me help you, you know, paint the best picture.

And I think it’s about asking a lot of questions, and I think it’s about putting that together. You know, for me, the first thing that I do automatically, I want to know what your tax returns look like. Where is your income coming from? Is it coming from a T4 or is it coming from professional income? Is it coming from business income? Is it coming from a dividend? Like I want to know the sources of the income and I want to know what income you have on paper.

Obviously, if we can use your income on paper, you’re as good as someone who has a salary. Same, same. Same, same. But that’s not always the case. So it’s about asking more questions. Most lenders, if you use sole proprietor income, they allow you to gross it up. Some allow like a 15-20% gross up. Some lenders, if you own a corporation and you’re taking a dividend, some lenders will allow us to gross up the dividends.

Also, some lenders will allow us to add back a percentage of your net income after dividend and taxes from your corporation. So there’s a lot of lenders that certainly have very unique programs and not every lender is the same.

I can tell you for self-employed, wide variety of what’s offered out there. So I really if you are self-employed and you know you’re looking to do a transaction, I think certainly seeking the advice of an unbiased mortgage professional is really key.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.

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