What is a Stated Income mortgage? It is a specialty mortgage that goes by a few different names, Stated income, Alt A, or Low Doc, but it is essentially a program for people that are Business for Self that can’t prove their income by
traditional means. It is often used by business owners that have lowered their taxable income by maximizing deductions and other business expenses. This is a great strategy at tax time, but the flip side is that the income used to qualify for a mortgage (line 150 on your taxes) can become so small, you no longer qualify for a mortgage, or your buying power is significantly reduced.
Who qualifies? The stated income program is for people that have been business for self for at least 2 years. They must have Strong Credit, at least 2 trade lines (items on your credit bureau) with 2 years of history, and be buying or refinancing acceptable real estate. Not for Commission sales people unless doing a conventional mortgage. Contact Mike Trollope (see below) for more details if you are paid by commission.
What type of Property is Acceptable? This is for Residential Properties. The property must be owner occupied with a maximum of two units. Not for commercial or investment properties. Not for Second / Vacation Homes. And not a crumbling shack, but a good marketable property.
How much do I need for a down payment? You need to have at least 10% down. At least 5% of the down payment must come from your own resources but the rest can be gifted by immediate family. The down payment can not be borrowed.
How much income can you claim? The amount of income that is stated must be reasonable for the industry, length of operation and size of business. This is a critical. They want to know that you are actually receiving this income and will be able to pay for this mortgage as well as other existing debts. A plumber with no employees probably isn’t making $250,000 a year. However if it was stated he earned $50,000 a year, that is reasonable.
Are the interest rates higher? Sometimes. At the time of writing, the rates are the same for a stated income mortgage as for a standard mortgage. In the past, some lenders have increased the rates slightly for a stated income mortgage.
Are there any higher costs? Yes. The default insurance premium is increased. If you are going with a 90% loan to value (10% down) then the premium for a stated income mortgage is 5.45% compared to 2.40% for a standard mortgage at 90% Loan to Value. Like a standard mortgage the premiums do decrease as your down payment increases. At 80% loan to value, the premium drops to 1.90%.
How much do I need to avoid the Default insurance? If you want to do a conventional mortgage with the stated income program, your down payment must be 35%, or a Loan to Value of 65%. With a standard mortgage you can technically avoid default insurance with 20% down.
Is there additional/different paper work required? You will need to prove that you have been business for self for at least 2 years. You will also need to prove you don’t owe taxes to Canada Revenue Agency.
To show 2 years of business you will need one of the following:
- Business License
- Articles of Incorporation
- GST/HST return
- Two years T1 Generals with Statement of Business Activities prepared by a third party
- Audited Financial Statements for the last 2 years prepared and signed by a Chartered Accountant.
To show no taxes owing they will require your most recent Notice of Assessment, or a declaration stating you owe no taxes.
Any other documents? Each lender has their own requirements and every client is different. They may ask to see business bank statements, to help support that the amount that was stated is reasonable. They may ask for T1 Generals to show company sales and what is being written off. They may even ask for a copy of your contract with a particular client if it accounts for a large amount of your business. It is best to be aware of your business and it’s financial state when you meet with your mortgage broker. Depending where your mortgage ends up, will determine what papers you will be asked for.
Do all the lenders offer a stated income program? No. It is a specailty program offered by a select number of lenders.
Do I have to do a stated income mortgage if I’m Business For Self? No. You can provide traditional proof of income which would be a 2 year average of line 150 on your Notice of Assessments. Depending on the nature of your business you can also gross up that amount by up to 15%, or add back some of the write offs that you used to reduce your income. It is best to speak with a trained mortgage broker to go over your options and determine which route is best for you. I recommend taking a copy of your T1 Generals with the Statement of Business Activities when you meet with your broker.
Where do I get more information? Contact Mike Trollope with Centum Mortgage Choice by phone or text at (204) 573-3938. Email email@example.com
Mike Trollope, Mortgage Broker
Office: (204) 727-2177
Cell: (204) 573-3938