If you are self-employed or on commission, you may be caught in a difficult situation right now; how can you ‘reduce’ your income on paper and, in turn, your tax bill, while still qualifying for a mortgage?
To find a solution to this dilemma, you can make use of a ‘stated income’ program, in which you provide a reasonable figure for lending purposes, without having to provide verification of income based upon tax returns.
The only requirements under this program are…. that you have an above average credit rating, and proof that you have been in business, or at least, in the same industry, for 2 or more years.
Okay, so far so good. I’ll take it, you say. But, hold on; as with all things that sound too good to be true, well, this one is too…. at least to a certain extent.
Please read on.
The downside is that the CMHC premium applied to this kind of mortgage qualification is close to double the regular premium. Now, while this is added to your mortgage, and might seem acceptable to you at the time, it’s nevertheless a cost added to the purchase of your property, and can result in tens of thousands of extra dollars in interest over the life of your mortgage.
In an effort to avoid this, it’s important that your mortgage planner or lender try to fully qualify your income under regular guidelines.
To do this, the bank or lender will take a 2-year average of the net income on your tax returns. If that’s not enough, there are other methods available before going straight to a stated income program.
First, many banks will allow a 15% ‘gross-up’ of this 2-year average, in order to reflect a more realistic picture of income if you are self-employed, but aggressively using expenses to pay less tax.
Under the new CMHC guidelines, implemented April 19th 2010, if your income has increased for 3 consecutive years, they will now allow the banks and lenders to use the most recent, highest year, and gross that up by 15%, instead of a 2-year average.
If this does not provide enough income to qualify, many banks and lenders will allow add-backs to income. The top three expenses on a tax return that can be ‘added back’ are Capital Cost Allowance, Business Home Use, and Use of a Vehicle.
However, please be aware that many expenses you might expect could be used, such as entertainment, are not allowed.
In my experience, more often than not, if a broker or lender will just take the time to review your tax returns in depth, for add-backs etc, you will qualify without having to resort to a stated income program and, in turn, save thousands of dollars in premium and mortgage interest.
If you are self-employed, or on commission, and want to qualify for a mortgage, please consult a competent mortgage planner and discuss these avenues, to see if they are applicable to your situation.
(Copyright Dara Fahy. All rights reserved.)