Saturday 10 August 2019

The Challenges Of Buying A Home In The Okanagan While Self Employed

I have been saving to buy a home over the last two years. It can be challenging when your saving money, paying rent, running a business, and raising 3 kids all while living in the expensive sunny Okanagan. Don't get me wrong I absolutely love where I live it is beautiful and family oriented, there are a million things to do when you can afford to do them and there are plenty of free things offered for every season as well. 

I have a dream to move my family into the neighbourhood I grew up in - Glenrosa! Glenrosa is a great place to raise a family, there is a cute little corner store, the neighbourhoods are all close knit family folks and that is where I want to be. Buying a home in Glenrosa costs between $475,000 - $700,000 for a two storey home where you can run a daycare downstairs separate from where you live which is exactly what I need. That is steep! And here are the issues with being a small business owner!

Banks require you to make over $100,000 annually for a minimum of 2 years or you have to have over $125,000 as a down payment. Self employed individuals have to make 6 figures before the banks will even look at them.

You can apply for a stated income mortgage but the requirements are very high as well. If you are considering a mortgage under the Stated Income Program with an "A" lender, the minimum downpayment required is 10% of the purchase price (5% downpayment is only available with proven income with a purchase price up $500,000). For properties above $500,000 (let's say $600,000) the minimum downpayment required is 10% of $500,000 ($50,000) and 10% for the remainder ($10,000) for a total of $60,000. In addition, the lender requires proof of 1.5% for closing costs (in this example, $9,000 more is needed). The total amount needed would therefore be $69,000. However, you will actually need a bit more for closing costs due to having to pay the property transfer tax ($10,000 on a purchase price of $600,000) plus legal fees/home inspection, etc.

To be exempt from paying the property transfer tax, the purchase price cannot exceed $500,000.

The monthly payment on a home purchased at $600,000 is $2,725.65. Here is a great example on how this breaks down:

Purchase Price - $600,000
Downpayment - $50,000
Amortization - 25 years
Interest Rate - 2.69%
Mortgage Amount (with insurance premium added on) - $595,792.50 (the insurance premium for stated income is calculated at 5.45% of the mortgage amount which is $565,000 x 5.45% = $30,792.50)
Monthly Payment - $2,725.65 (excluding property taxes)

The amount of stated income required by the lender (and insurer) for the example above is approx. $119,500 (allowing for annual property taxes of $3,000 for debt servicing). I have also used the lender's maximum debt servicing at 39% of income for a credit score above 680. The stress test rate is 5.19%.

To avoid the insurance premium with stated income, lenders require a minimum 35% downpayment.

The lender also allows for other debts (car payment, etc.) but the amount of monthly obligations cannot exceed 5% of the monthly income used. If it does, then the amount of mortgage you will qualify for will be reduced accordingly.

An annual income of $75,000 allows for a maximum mortgage of $352,255 as all lenders must use the "stress test" qualifying rate of 5.19% in all situations (proven or stated income).

Most of us small business owners are not making 6 figures which puts us out of the running for buying a home that is meant for a family and a home based business. The rules have made it impossible for us to qualify putting our dreams further out of reach. There are ways to get there it is just going to take a lot of patience and hard work.

The most popular stated income lender is Genworth and they can help you get a mortgage but all the above rules still apply. Along with these:

Borrower Qualification:

Income & Employment
Minimum of two (2) years business-for-self tenure
The self-employed borrowers stated income should be reasonable based on the length of operation, type and size of the business, and should be able to service the required mortgage as per the GDS/TDS guidelines.
Reasonableness of the stated income should also be reflective of the personal financial profile of the borrower.
Lender to provide the line 150 from the borrower(s) most recent years’ Notice of Assessment (NOA)

> 80% LTV Minimum credit bureau score of 650 is recommended
≤ 80% LTV: At least one applicant should have a minimum recommended credit bureau score of 680
Minimum 2 trade lines with at least two (2) years history.
No mortgage, installment or revolving credit delinquencies appearing on the credit bureau in the past 12 months.
No reported defaults on residential mortgages for the past 7 years
No previous bankruptcy

Down Payment
≤ 90% LTV Minimum 5% of the down payment from the borrowers own savings. The remainder may be gifted from an immediate family member.
Qualified home buyers may use traditional down payment sources including personal savings, non-repayable gift from immediate family member(s), proceeds from sale of property.

Additional Criteria
Borrowers with commission income are ineligible
Lender to ensure borrower(s) have no tax arrears
All applicants used to qualify must occupy the property (If two unit property, one unit must be owner occupied)
Spousal guarantors acceptable
Borrowers are permitted one (1) Genworth Canada insured Business for Self Program mortgage

The best thing you can do is start saving right away. Saving thousands of dollars is doable if you have the goal and mindset to do it. I am working my way up to this and would like to be in my dream home within a year and a half. Follow me on Pinterest to find great ways to save for your dream home and learn more about buying a home and creating a solid future for you and your family!

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