Tag Archives: self employed

As gig economy grows, borrowers shut out of mortgage market

As gig economy grows, borrowers shut out of mortgage market 

It seems as if everyone’s got a side hustle these days. More than 40% of Canada’s millennials have worked in the gig economy over the past five years, according to a study from the Angus Reid Institute, and although they’re bringing in extra cash, their side hustle can be a hurdle to qualifying for a mortgage.

Taylor Little is the CEO of Neighbourhood Holdings and noted that more than one-third of their borrowers now identify as gig economy workers, all of whom have turned to alternative sources after being denied traditional mortgage financing. More traditional mortgage lenders look specifically for stable income streams, making qualifying for a mortgage near impossible for non-salaried employees.

Increasing unaffordability in major urban markets (and even that’s expanding beyond the long-time hotspots of Toronto and Vancouver to areas like Montreal) is coinciding with a decreasing ability for a growing demographic to get a conventional loan. At the same time, people aren’t seeing their incomes grow at the same rate as their housing costs.

There are also more opportunities now for entrepreneurship. People are not only looking for additional income, but for ways to capitalize on preferred skill sets or to engage in more flexible work arrangements. The lending challenge is dealing with multiple income streams that can be based on contract, project, season, or a combination of factors.

Some lenders are changing how they approach self-employed borrowers, but many lenders, particularly banks, are still looking at the challenge of reconciling the non-standard income stream with the framework they have to make lending decisions.

“There’s no doubt a lot of work is being done to change things, but for now, the gold standard for bank lending is to have a T4 showing steady income or six months’ worth of bank statements so you can show regular deposits,” Little said. “If you don’t conform to that, the banks have a really hard time wrapping their heads around making you a big loan.”

Little noted the irony of thinking about concentration risk in a loan portfolio versus borrower income; for a borrower with a steady salaried income, there is 100% concentration risk to their job. If that person loses that job, it goes from 100 to 0, whereas for the gig economy worker, it might go from 100 to 80, with a likelihood that they will quickly fill that gap. Borrowers are looking to diversify their income sources for any number of reasons in the same way that lenders attempt to diversify their funding sources.

“From our end, it’s definitely an area where we can help on the alternative side,” Little said. “We are not originating tens if not hundreds of billions of dollars of mortgage per year. We’re in the hundreds of millions, and because of that, we can build our own systems and look at a borrower’s application more holistically. That’s given us that flexibility to serve this part of the market.”

Around 40% of Neighbourhood Holdings’ borrowers are self-employed, Little said. He sees their role as helping borrowers buy time; they get a short-term mortgage but as they pay off their interest-only loan, they’re working with a mortgage broker to help reframe their situation and income to fit into a bank’s box.

Brokers might even want to make the extra effort to market to self-employed individuals because in many cases, these people are unable to walk into a bank and walk out with a mortgage because they’re often shut out by the banks at first glance. Changing expectations and figuring out a plan to get to their ultimate goal takes time. There’s work that borrowers can do, Little said, but it doesn’t happen overnight.

In actuality, Little said, the credit quality of their borrowers is pretty high, and they’re often some of the best types of borrowers that a lender could ask for.

“It’s not criminals and deadbeats . . . these are some of the scrappiest people that you probably want to lend to. They have three different income sources, or four, and these are people that if, if one contract goes away, they’re good at finding another,” Little said.

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Starting today, self-employed Canadians have a better shot of qualifying for a mortgage

Photo: James Bombales

It’s long been an accepted fact that self-employed Canadians have difficulty qualifying for mortgages. But that could be able to change, now that new lending rules are in place.

Starting today, new guidelines from Canada Mortgage and Housing Corp. (CMHC) will make it easier for anyone who has been self-employed for less than two years to qualify for a mortgage. The new rules will ask lenders to consider additional factors in their decision-making process, such as predictable earnings, cash reserves and education.

“Self-employed Canadians represent a significant part of the Canadian workforce,” writes CMHC chief commercial officer Romy Bowers, in a statement. “These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.”

Roughly 15 per cent of Canadians identify as self-employed, according to CMHC data, and the agency predicts that the number will increase as the “gig economy” continues to grow.

Approved lenders, including the country’s big banks, are under no strict obligation to observe the new guidelines, though it is likely that each will take their own approach to the new rules, according to CMHC spokesperson Audrey-Anne Coulombe.

“Implementation of CMHC guidelines may vary among lenders,” she tells Livabl. “These new guidelines are meant to be principle based and not to be too prescriptive to provide maximum flexibility for lenders.”
She adds that the overall objective of the rules was to provide additional guidance to self-employed Canadians looking to qualify for a mortgage.

“These policy changes will make it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates,” she shares.

Source: livabl.com –  

 

 

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CMHC explores cutting red tape for self employed borrowers

The national housing agency is exploring ways to make it easier for entrepreneurs and new immigrants to buy a home by cutting some of the red tape required to prove they can afford to pay the mortgage.

“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” Evan Siddall, the CEO of the Canada Mortgage and Housing Corp., said in a wide-ranging interview with The Canadian Press.

“It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs,” he said.

Anyone who wants to buy a home in Canada without a down payment of at least 20 per cent of the purchase price is usually required to get mortgage loan insurance from the CMHC, which requires a smaller down payment of five per cent on a home worth up to $500,000.

A 10-per-cent down payment is required for the portion of the price over $500,000, with $1 million being the maximum property value allowed.

The mortgage insurance comes with a premium, which the lender will then pass on to the person buying the home.

Borrowers need to satisfy lenders they will be able to make their mortgage payments, which usually means providing proof of employment and a few pay stubs. But that can be tricky for people who just started their own business.

It can also be a barrier to those whose employment history has gaps for other reasons, such as having recently immigrated to Canada.

People who are self-employed, for example, usually need to provide notices of assessment for the previous two years. Their income is determined by averaging those two years, although the most recent year can be used if it has increased annually for at least four years.

They also need to have been doing the same type of work for at least two years.

Dan Kelly, president of the Canadian Federation of Independent Business, said more flexibility would be welcome, especially for startups.

“If one starts a business or is self-employed, the lines between their personal and business finances are often quite blurry,” said Kelly.

“Often, their personal assets are required to get financing for the business. But then they also have a challenge getting financing on the personal side, because they don’t have the nice, clean letter of offer from an employer that is often quite convincing in these situations,” he said.

Any relaxation of the rules would naturally increase the risk. So Siddall said the agency is looking at how to manage that, including different ways to document income, and higher premiums.

“Can we charge for that risk? Better to charge that risk than not to make it available,” he said.

Jack Fiorillo, a broker with TMG The Mortgage Group in Woodbridge, Ont., said he expects the CMHC to be fairly conservative on this front.

“It will be a very small sandbox that CMHC will play in, probably at the beginning, and then maybe if once their risk appetite increases, maybe they can expand that box,” said Fiorillo.

He said he expects the potential change to make it easier for a relatively small number of self-employed people to get a mortgage, and they will likely have to pay higher interest rates.

The CMHC said it has been compiling data on how many would-be homeowners have their mortgage applications rejected for these reasons, but cannot disclose those numbers right now because it is based on conversations with commercial lenders.

“We are still doing research and development to move this forward,” CMHC spokesman Jonathan Rotondo said in an email.

Siddall said the Crown corporation has raised the idea with its board and expects to announce something within the next six months.

Source: The Canadian Press

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Why trouble at alternative lender Home Capital could reduce your mortgage options

A real estate sold sign hangs in front of a west-end Toronto property Friday, Nov. 4, 2016.

Alternative mortgage lender Home Capital Group is in hot water. Its stock has plunged and customers pulled $762 million in savings from some of its deposit accounts on Wednesday and Thursday alone.

 

The company’s woes are affecting other alternative lenders, which could have significant consequences for a number of Canadians looking to get a new mortgage or renew their existing loans.

Back-up: What does Home Capital do and why is it struggling?

Home Capital is a Toronto-based lender that offers so-called alternative mortgages, among other financial products, through its principal subsidiary, Home Trust Company. Home Trust provides uninsured mortgages to clients who generally can’t borrow from traditional banks to buy a house, usually because they have bad credit, little credit history or are self-employed. Alternative mortgages normally carry interest rates that are much higher than what you’d get at one of the big banks, because of the elevated risks involved in lending to this subset of borrowers.

The trouble for Home Capital, which is one of Canada’s largest alternative mortgage lenders, started last week, when the Ontario Securities Commission (OSC) alleged that the company broke securities law by making misleading disclosure after the company believed it discovered some brokers had falsified loan applications. The company has said the allegations are without merit and vowed to defend itself.

 

Although the events OSC referred to happened in 2015, many of the company’s customers reacted to the news by withdrawing deposits, which triggered a liquidity crisis. Home Capital said Thursday it had secured a $2-billion line of credit as a funding backstop, but, according to some, its future remains uncertain.

 

Home Capital’s problems are affecting other alternative mortgage lenders, whose stocks have also suffered.

“Home Capital contagion has spread to the entire mortgage market, in particular, alternative mortgage lenders,” National Bank of Canada analysts Jaeme Gloyn and Victor Dri form wrote Thursday.

Does this affect you?

It depends. Canadians who can get a regular mortgage likely have nothing to worry about. But if you’re looking to buy a house with little credit history or bruised credit, this could affect you. Self-employed Canadians who’ve been turned down by the banks might see the biggest impact.

The Home Capital crisis, in fact, could result in higher rates for alternative mortgages, according to Mike Rizvanovic at Veritas Investment Research.

Bad press on Home Capital has raised worries about companies that operate with a similar business model, he added.

 

“It’s not fair, in a sense, because Home Capital’s problem is not something that you see with these other lenders,” Rizvanovic told Global News.

But psychological as the reaction of savers and investors might be, it has very real consequences.

Some of Home Capital’s competitors could also face liquidity issues. They would then have to offer higher interest rates to attract the deposits they need to help fund their mortgages and have to pass on some of those costs to customers by raising mortgage rates, Rizvanovic said.

The end game could be even higher mortgage rates for Canadians who can’t access traditional mortgages.

Entrepreneurs and self-employed people are especially vulnerable because they are the ones most likely to not only get alternative mortgages but to renew their loan with an alternative lender at the end of the term, Rizvanovic noted.

 

Homeowners who got alternative mortgages because of little or poor credit history are often able to renew with an A-lender at a cheaper rate because they’ve been able to build up or repair their credit over the course of their previous mortgage term, he added.

Self-employed Canadians who don’t have enough proof of income to qualify for a plain vanilla mortgage, on the other hand, often have no choice but to stick to alternative mortgages, Rizvanovic said.

Source: 

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Braving the Wilds as a Self-Employed Borrower

 

Self-employed – The fastest growing group of alternative borrowers, business for self-clients sometimes struggle to provide income verification that meets the conditions required by prime lenders. With 1 in 5 working Canadians now in business for themselves, this is an important segment that deserves extra consideration for your marketing efforts.

Amy De La Hunt, a writer and editor in St. Louis, gathered mountains of documentation last year to apply for a mortgage as a self-employed borrower.

She had several years of tax filings and contracts to establish a track record for her income. Then, midway through the process of buying a home in suburban Crestwood, she started a full-time job.

“Once I had only one pay stub from my full-time employer, then everything was like magic,” De La Hunt said. “It opened my eyes to how much easier it is.”

For all the benefits that being self-employed imparts, getting a mortgage is not among them.

Self-employed borrowers receive six loan quotes for every 10 received by people pulling down W-2s, according to a Zillow Mortgages analysis.

Lower credit scores are one of the primary factors, according to the analysis, which used a database that logs nearly 2 million loan requests a month.

Among self-employed workers, 47 percent have self-reported credit scores below 720, compared with 23 percent among those who are not self-employed. That’s despite the fact that self-employed borrowers report household incomes that are 81 percent higher and make larger down payments than those who are not self-employed.

Business vs. personal debt

The lower credit scores might not always be a reflection of a self-employed borrower’s ability to pay, said Staci Titsworth, regional mortgage sales manager for PNC Mortgage in Pittsburgh.

Some business owners take out car loans and open credit card accounts in their own names, even though these are strictly for company use. That boosts the business owners’ debt volume, which can count against their credit score, Titsworth said.

Lenders can sort through situations like this, but it takes paperwork — on top of copious filings already required of self-employed borrowers (two years of personal tax returns with all schedules attached, plus two years of business tax returns for each business).

Loyal customers with a solid history of making loan payments are often incredulous at how much paperwork is required — and how inflexible the rules are, Titsworth said.

“It can be overwhelming for someone who’s successfully self-employed, who owns all these businesses and is a loyal bank customer, to hear us say we’re missing this one schedule from 2013. They’re like, ‘Are you kidding me?’” she said.

Some people will respond, “You can see I have enough cash to pay for this house; isn’t that good enough? And we have to say, ‘No, we need that paperwork,’” she added.

Keep calm & gather documents

The good news is that, at the other end, it’s entirely possible for many people who are self-employed to qualify for a mortgage.

“A lot of people think artists can’t ever buy homes, or that if you’re self-employed, you can’t buy a home — but we’re here and we each have our own studio and a weekend house,” said Linda Hesh, an artist in Hollin Hills, VA, who lives in a mid-century modern home with her husband, hand engraver Eric Margry.

They’ve been through the home financing and refinancing process many times. They found at the start that lenders wanted a larger down payment from them than from people who weren’t self-employed.

And then there’s the paperwork.

“You just have to do it; it’s going to be a lot of pages,” Hesh said.

She recommends finding a real estate agent who’s comfortable working with self-employed borrowers, because “they can be really helpful.”

So can staying calm, she said.

Source: Zillow.com – BY ON 19 DEC 2014

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Self-employed? Prepare for a long conversation with your mortgage broker

Getting financing isn’t as easy as it used to be, say mortgage brokers — and for the 15% of Canadians who earn money for themselves without a steady employer’s salary, it’s harder still.

If you’re self-employed and about to apply for a mortgage, be prepared for some serious form-filling. Getting financing isn’t as easy as it used to be, say mortgage brokers — and for the 15% of Canadians who earn money for themselves without a steady employer’s salary, it’s harder still.

“Back in the day, five years ago you could hold up three fingers and say ‘I promise I earn $100,000, and many lenders would take your word for it,” says Claire Drage, a senior mortgage agent with Mortgage Alliance in Greater Toronto. But things have changed, she warns. “It will take more paperwork, more documentation, more justification from the borrower on why they should be approved.”

Since 2008, the government has lowered the maximum amortization period from 40 to 25 years, and reduced the maximum gross and total debt service ratios to 39% and 44% respectively. Then, last October, the Office of the Superintendent of Financial Institutions’ B-20 rules put the underwriting practices of federally regulated financial institutions under scrutiny.

“Generally these changes have made for more rigorous review of documentation which does impact the self-employed borrower programs to a greater extent than salaried borrowers,” says Gary Siegle, Alberta-based VP of the Prairies for mortgage services firm Invis.

The self-employed often hinder themselves with creative accounting to lower their income. “They may have a different way of reporting all their income, reducing all their taxes as much as possible. Those are the ones that are more challenging,” says Daryl Harris, a broker at Verico One Link Mortgage & Financial in Winnipeg, and chair of the Canadian Association of Accredited Mortgage Professionals. Those not reporting cash jobs also reduce their provable income, making it harder to get a mortgage.

 

“Even though you’re self-employed and you benefit from amazing tax breaks, and your personal income tax return is incredibly low, you still have to prove to the lender that you can afford to pay this mortgage back,” adds Ms. Drage.

For those that find it hard to prove their income, stated income programs are an option. Designed for those with less than three years’ business operation, it requires at least a 10% downpayment, and not all lenders support it. TD Canada Trust, for example, looks instead at documented income such as T1 financials, business financials, and notices of assessments.

Changing attitudes among lenders makes it more difficult for the self-employed to deal with top-tier banks, says Don Barr, president of Verico Select Mortgage in Victoria. “It is forcing a lot of stuff out of the ‘A’ business and into the alternative business,” he says. Alternative lenders, some of which are not federally regulated, may take a less rigid approach when assessing self-employed applicants. However, the trade-off is often a higher interest rate.

There are several things to remember when applying for financing:

• Loan-to-value matters. Offering a 10% downpayment will make the process far more difficult. They care more than ever about up-front equity.
• Keep up with your payments. Make sure that you are up to date with the CRA before applying to a lender.
• Be organized. Ensure that all your accounting and tax documentation is up to date, and that you are reporting
• Pay off your credit. Get those outstanding cards and lines of credit paid down before you let your lender score you.
• Be prepared to adjust your expectations. You may have to adjust your target price after talking to a lender.
• See if your lender will ‘gross up’ your income. Some lenders may add a percentage when assessing your taxable and/or non-taxable income to allow for business expenses you incur.

And above all, start early in the process, preferably with a pre-approval before you look for a home, because one thing’s for sure: you’ll be doing more hoop-jumping than you think.

Source: Danny Bradbury, Special to Financial Post |September 19, 2013 

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20% housing correction would push young homeowners under water

Young Canadian homeowners are disproportionately vulnerable to a housing correction, and more than 1 in 10 would owe more than they owned in the event of a modest or larger pullback in the market, according to a report.

The report, by the Canadian Centre for Policy Alternatives, was released Monday. The left-leaning think-tank urges governments to implement policies aimed at bringing down debt loads before its too late.

Policymakers have been warning for years about the dangers of high house prices and the debt loads they tend to generate. But the CCPA report is among the first to quantify how those debt loads are skewing disproportionately towards younger people, who often have no other assets than the house they borrowed so much to buy.

1 in 10 wiped out by 20% correction

Their debt loads make them even more vulnerable than the population at large to a housing correction.

The Organization for Economic Co-operation and Development (OECD) issued a warning Monday about the risk of correction, particularly in Toronto, which has a rapid pace of new condo development.

It pointed to high debt-to-income levels in Canada and urged tightening on mortgage lending in markets such as Toronto and Vancouver, where homes are expensive compared to incomes.

“In Ontario, and especially Toronto, economic activity has been relatively buoyant and demand by foreigners has been boosted by the falling Canadian dollar. That said, newly completed but unoccupied housing units have soared in Toronto, increasing the risk of a sharp market correction.”

Central bank says houses overvalued

The Bank of Canada estimates Canadian house prices are currently 10 to 30 per cent overvalued, and some private-sector economists say the problem is even worse.

“Declines in real estate prices would have a strongly disproportional impact on young homeowners,” CCPA economist David Macdonald said. “If, or more likely when, real estate prices fall, families in their 20s and 30s can expect to lose a substantial portion of their net worth, and could find themselves owing more than their house and other assets are worth.”

He offered some crunched numbers to back up that contention.

The debt-to-income ratio for people in their thirties has almost doubled since 1999, hitting a new high of 4 to 1, the highest of any age group.

Young families hit hardest

If Canada sees a housing correction near the midpoint of the Bank of Canada’s projections, younger families would be disproportionately hit by that:

  • Families with people in their thirties would lose an average of $60,000, which represents 39 per cent of their net worth.
  • 1 in 10 families with people in their thirties or younger (169,000 families across Canada) would have a negative net worth, meaning their debts are larger than their assets. Today, the CCPA says there are 44,000 families in this group who are under water even before any housing price correction.
  • If the correction is larger, say something in the range of 30 per cent, the impact would be even greater, as 294,000 households or one in seven families would be underwater.
  • People in their twenties would lose less in dollar terms, less than $40,000 each on average, but that figure would reduce their net worth by 45 per cent.
  • Families headed by people in their forties and up would lose more in dollar terms to a housing correction because their houses tend to be larger and worth more. But with an average loss of $70,000 to $80,000, that only represents 23 per cent of their net worth because they tend to owe less, and they tend to have other assets beside their house.

Housing corrections tend to have a cascading impact on the rest of household finances because of the large amounts of leverage involved in buying a home. As a rule of thumb, every 10 per cent decline in house prices represents a loss of 20 per cent on the average person’s net worth, Macdonald said.

“In cities with higher prices, like Toronto, Vancouver and Calgary, young families would likely see declines in net worth dramatically worse than the national average due to higher leverage,” he said.

“A badly managed downturn in real estate prices could wipe out the wealth of a large number of Gen-Xers and Gen-Yers,” he said. “We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction.”

Source; CBC News Pete Evans, CBC News Posted: Nov 09, 2015 9:27 AM ET

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