Case Study

1. SCENARIOStated income for business for self individuals that own income properties

Mr. & Mrs. had two rental properties of which one was coming up for renewal. Mrs. is in business for herself showing a gross income of $75K however her line 150 (income earned for the year) was only $17K.

Problem

In today’s mortgage world, lenders are very stringent on business for self clients. Prior to, most individuals were allowed to “state” an amount earned without having to provide financial documents. Today, “stated” income allows us to review the income of the client and to increase the amount they make over and above their line 150 on their tax return. There is a "reasonable" yearly income amount that is deemed appropriate for that line of work or type of business and must be approved by the lender. Clients have to provide their NOA’s (Notice of Assessments) to show no taxes are owing to CRA (some lenders are lenient on this as well). Additionally, if you have an income/rental property, you are only able to finance as high as 80% of the loan to value. This can be tricky. Usually the stumbling block is the Total Debt Servicing Ratio of the client. With smaller income amounts being claimed on line 150, their stated amounts are increased to make the deal work. There is a lot of information collected with these types of applications (rental agreements, etc.)

Solution

We found a lender that would allow us to use a Net Worth Requirement demonstrating ownership of eligible assets and using 12 or 24 months worth of monthly Principal & interest payments, based on a 5-year interest rate and 25 year amortization. The other rental property is considered an eligible asset and in turn we used the equity built up in that home to get this mortgage to work.

Results

The client was able to look at their overall financial picture and make some changes to accommodate what lenders were going to be requiring with her other rental property and additionally how much she claims on her taxes so that her income is more in line with acceptable lending standards.