Business for self & Taxable income
Business-for-self - or BFS - includes a diverse group of business owners, sole proprietors, partnerships, and other self-employed people. They can often find it frustrating to get a mortgage, with income qualification in particular being a hurdle. In our BFS spotlight, we've dug into some of the challenges past BFS clients have faced, and how we were able to help them. You can find the table of contents here.
In this article, we dig into a common issue faced by many Business-for-Self clients regarding taxable income. Normally, the ability to make business expense deductions is a benefit that reduces your overall tax burden. But when it comes time to get a mortgage, this can also reduce your reported income, making it harder to qualify for the amount you need…
Situation: When we met Devani and Sarah*, they were renting a house and getting ready to buy in the Hamilton area. Both work in the digital media industry, and have a very stable and consistent work history (+10 years experience each).
They each manage their businesses as sole proprietors, and consistently file their business income as part of their personal tax returns. They both work out of their rental home.
Challenge for BFS clients: Using the reported net income on their tax returns, they qualified for a mortgage almost $100K less than what they required.
Solution: The first option is a straight-forward 15% gross-up of net income. Many lenders with Business-for-Self mortgage products allow for this pretty much "out of the box". But in this case, it still didn’t add enough income to qualify them for the needed amount.
So on to plan B, the add-backs approach. It's similar to the 15% gross-up method, but much more work because you need to get into the details of their business (and each lender has their own criteria on how to do this). We built a straight-forward story that made sense to the lender, and added back almost 25% to their net income! Devani and Sarah were pre-approved for the mortgage they wanted, and can now focus on finding a house in their desired price range. Congrats!
There is no magic formula here - it's "just" a matter of listening carefully, being diligent in exploring the options, and asking the right questions. And you need to know which lenders to work with based, on the situation.
Whether you are self-employed or not, we give the same level of diligence, attention to detail and support to all of our clients. Contact us for a no-obligation review your mortgage and financing options, or Apply Now through the button at the top right of the page.
*Names and financial details have been modified as needed to protect privacy :)
