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:
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 firstname.lastname@example.org
Joe and Sue each buy a house at the exact same time for the exact same price and get a mortgage for the exact same amount. The only difference is Joe uses a Big Bank, and Sue uses a monoline lender for their mortgages. Let’s assume they both received a rate of 2.99% for a 5 year fixed term.
Three years into their mortgages, Joe and Sue are both going to be paying off their respective mortgages which are both at $250,000 at the time of the payoff. Now to keep the comparison fair, we will pretend that interest rates have not changed at all for any of the terms, whether it is the posted rates or the discounted rates. The rates are based on the actual interest rates at the time of writing.
Now because they have ended their 5 year contract early, they will have to pay a penalty. Both agreed at the time they took out their mortgage they would pay the greater of 3 months interest or the Interest Rate Differential (IRD). The IRD is in place so that the lender will be reimbursed for any income they would lose because you broke the contract early. In theory it should only apply when rates have gone down from the rate you agreed to pay. In this example, they each agreed to pay 2.99% for 5 years, so if rates had dropped to 1.99% the lenders would be entitled to the 1% difference for the remaining two years. Which is fair. If you invested $1000, and were told at maturity your investment would be worth $1200, you would not want to get $50 and be told, “sorry, someone else changed their mind.” You, like everyone else, would want the full $200 you were promised. Same idea. Only the Banks are using the IRD to punish you for leaving, or to force you to stay with them. Which is not fair, nor the idea behind an IRD.
In our example, Joe and Sue each have to pay a penalty. But how much they have to pay is a shocking difference!
Sue’s Monoline Penalty: $1,868
Joe’s Big Bank Penalty: $8,750
That’s a difference of $6,882 !!!
So why such a huge difference? In the simplest explanation, it’s the “discount” given by the big banks.
Let me explain. With a Monoline lender, like Sue used, that mortgage brokers usually use, they offer their best rates upfront. So they generally only have one rate for each term length. Where as the banks have Two rates for each term. The posted rate, and the discounted, or special offer rate. Almost everyone actually pays the discounted rate, but the banks use the posted rates when calculating the Interest Rate Differential. That is how they come up with huge IRD penalties.
The math behind it can be a bit confusing when you read it, so pretend you’re back in high school math class…but pay attention this time. 🙂
So the banks take the rate you are paying (2.99% in our example) subtract the difference between what is the current posted rate for a similar term for the time remaining (2 years at 3.04%) less the DISCOUNT GIVEN. So the posted rate in our example is 4.79% minus the real rate of 2.99% which is a discount of 1.80% That is what is going to cause the pain. So they take the similar posted term rate then minus the discount (3.04% – 1.80%). Then they multiple that number by the balance owing and the time remaining.
Big Bank IRD calculation
2.99% – (3.04% – 1.80%) x $250,000 x 2 years = $8,750
Compared to a true IRD calculation
(2.99% rate – 2.79% comparable rate for term remaining) x $250,000 x 2 years = $1,000 which is less than the 3 months interest, $1,868, which is what Sue would be paying. The Interest Rate Differential should not have come into play.
The Numbers being used, based on rates at time of writing
|Posted Rate for 5 year term||4.79%|
|Rate Clients are paying for 5 year term||2.99%|
|Posted Rate for 2 year term||3.04%|
|Discounted Rate for a 2 year term||2.79%|
To make up for such a monstrous penalty from his bank, Joe would have neede a rate of 1/2 of a percent (0.5% or 0.005) which is 2.49% lower than best rate at the time from the banks. There is more to consider with a mortgage than just rates. Know your other risks.
At the time of writing penalties according to the Big 5 Banks online calculators and their listed posted rates: BMO $8750, Scotia $8250, RBC $9057.85, CIBC $10,677.65, TD Canada Trust online calculator not working but it would be $8750. The Banks penalties differ somewhat mainly because of differences in the banks posted rates.
When shopping for a mortgage, be aware that rates are not the only thing you should consider. Although rates are obviously important, interest rates are only one of many factors to evaluate when deciding on your best mortgage. Contact Mike Trollope (204) 573-3938 or email email@example.com for a free consultation.
One of the biggest factors in obtaining any new credit is what your credit score and overall credit picture look like. Your credit score is a number that lenders use to determine the risk of lending you money. Whether you are applying for a credit card, car loan or coming to see me for your mortgage, a credit check will be done that will look at your credit history, score and overall credit picture. All of your active credit products report to a centralized credit bureau which tracks payment history and outstanding balance. The credit bureau is the “big picture” of what your credit situation looks like.
Most people know they have a credit score but lack the understanding of what truly influences if they have a high or low score. Depending on what centralized credit bureau we are talking about, credit scores can range anywhere from 300-900 and the higher your score the better.
Factors that influence your credit score:
I have had a ton of clients that go into the mortgage financing process having no idea what their credit picture looks like. It is important to understand that age, marital status, salary, occupation, or employment history, have NOTHING to do with your credit score itself. Think about the credit products you currently have and reference the 5 categories listed and you can have a pretty good idea where you are on the credit rating scale. I hope this information helps you understand your credit score and overall credit picture a little better.
In my blogs I have covered a wide range of topics, from tips to save for your down payments to the very core details of what a mortgage is. I wanted the chance to reflect on why I got into the mortgage business and why I find it such a rewarding career.
The reality is I never went looking for this particular career but the mortgage industry found me. I was a financial advisor at a Major Canadian Banking institution in which I was taking care of every aspect of a client’s financial portfolio including mortgages. I enjoyed it but I really wanted to become a specialist in one particular field that I had always enjoyed.
From the first time that I completed a mortgage for a client I knew there was something special about this industry. When I can pass on the great news to my clients that their mortgage is approved and they are going to get into their dream home, that is one of the best feelings in the world. I know how hard clients work to put themselves in the position to obtain a mortgage and it is an absolute privilege to complete that great accomplishment for them.
Because of that hard work it is important that you also obtain the mortgage that is going to fit your individual needs and save you the most money. You would shop around for a new TV wouldn’t you, to make sure that you’re getting the lowest price and the right TV to fit your needs? So why not let me shop around for your mortgage to make sure all those hard earned dollars are getting the most value. As a broker I have access to over 30 lenders and will do all the work for you to add convenience and comfortability to the mortgage experience.
It wasn’t a direct path to the mortgage industry but I am glad this is where it led. I look forward to making sure your mortgage experience is second to none because personally and at Centum Mortgage Choice that is what we stand for.
Whether you are buying your first home or selling and moving to another home, your down payment is a major factor in having the means to complete the transaction. Very few home buyers have the cash available to buy a home outright. Most of us will require a mortgage and it is important to understand the down payment questions that arise when it comes to obtaining your mortgage. How much will you need for a down payment to buy your home, where can the down payment for a mortgage come from and what are the rules from the lenders and government.
The minimum down payment for an owner occupied property in Canada is 5%. The minimum down payment for a rental property in Canada is 20%. The down payment for a mortgage will be approved by the lender if it meets one of the following conditions:
1. The down payment comes from savings (own resources) or RRSP and the lender will be asking for a 90 day history on the account to verify where the funds came from.
2. The down payment is gifted from a family member, the donor and you will be asked to sign a gift letter plus show the transfer of gifted funds into your account prior the mortgage funding
3. The down payment is from the proceeds of sale of another property in your name
As a mortgage broker I see the struggles that clients are having these days to save enough to not only cover your down payment but cover your closing costs as well. Closing costs are items like land transfer tax, legal fees and adjustments upon closing of the transaction. For closing costs you should budget 1.5%-2% of the purchase price and the lender will also want to see that you have those funds available. It can be a fine line sometimes between saving enough and paying down debt. With rent costs high and home ownership so important to people, here are a couple recommendations to get to your ultimate goal faster:
1.) Set up a pre authorized transfer plan: to either an RRSO for first time home buyers or a savings account. This is the easiest way to accumulate savings and it might help to keep it separate from other savings to keep from digging into them.
2.) Live within your means: right now you technically can afford that $700 vehicle payment a month, but if you add a mortgage your high vehicle payment is going to significantly affect your affordability. Obtain a more affordable vehicle which will help you save for your down payment as well as increase your affordability.
3.) Sacrifice: Home ownership may come with some sacrifice. Try cutting out some discretionary spending which I am sure everyone knows what I am talking about.
4.) Pay down high interest rate debt: high balances on things like credit cards can be eating into your ability to save. The higher the interest rate, the less of your payment is going towards paying back the principle amount that you borrowed.
I hope you find this advice helpful, if you have any questions about down payment or mortgages in general don’t hesitate to give me a call!
Everyone talks about CMHC (Canada Mortgage and Housing Corporation) insurance when it comes to discussing mortgages but how many people actually understand what it is. CMHC insurance is Mortgage default insurance, which is mandatory in Canada for all “high-ratio mortgages” – those with down payments of between 5 and 19.99%. What it does is protect lenders should borrowers ever default on their mortgage loans. The premium is a small percentage of your mortgage amount, which is then added on to your mortgage and paid off over the life of the loan.
As most know the minimum down payment for a home purchase is 5%. With housing prices rising steadily over the years they have become great opportunities for investment. However at these prices it is tough to produce enough of a down payment to avoid paying the insurance premiums. Just imagine if there wasn’t the insured mortgage option and everyone was required to put 20% as a down payment. For a $250,000 home that is $50,000 dollars which for a lot of people would only be a dream to obtain in a reasonable period. Mortgage default insurance has allowed me to help countless numbers of deserving home owners get into their dream homes.
CMHC is the largest and most well-known of the default insurers but Genworth Financial and Canada Guaranty are also available to use depending on which lender you are obtaining your mortgage with. The premiums that are paid are very similar in all three insurers as they quite often follow each other when premium percentages change.
An example of what your CMHC premium with 5% down payment as of March 14th 2014:
(Purchase price $250,000) * 5% = (Down Payment $12500)
$250,000-$12500 = (After Down payment taken off $237500)
$237500 * 2.75% = (CMHC Insurance $6531.25)
$237500+$6531.25 = (Total borrowing amount $244031.25)
Recently CMHC has announced that they are increasing insurance premiums as of May 1st 2014. On average the premiums are increasing 15% which in the big picture doesn’t change home affordability very much but the increase will add between $3 and $5 to the average monthly mortgage payment. As a mortgage broker I like to keep my clients as informed as possible so I hope this helps you understand default insurance a little better.
This topic is one of the most highly debated and popular items to discuss when it comes to your mortgage. The reality is that there really is not a tried and true option that is better for every client. The option that is best for a particular client is the one that they are comfortable with based on several factors. In order to understand what you will feel comfortable with I think it is important to go back and understand how the banks/ lenders set their interest rates.
Variable rate mortgages can change with market conditions at anytime. They are lower interest rates at current time as they represent today’s cost of borrowing funds and fixed mortgages take a long term view with the understanding that rates will rise over time. The variable interest rates are set based on considering what the Bank of Canada prime rate is and then subtracting a certain percentage off of the prime rate. For example if there is a lender offering prime (3%) minus (.6%)= 2.4% variable rate. Your variable interest rate will raise if the prime rate increases. A couple of other things to understand about variable rates are:
Fixed rate mortgages are known as the “safer bet”. Your mortgage rate is locked in for a specific contract normally 5 years. The lenders set these rates based on shorter term predictions on where interest rates are going. Fixed rates are normally higher then variable rates because they are a guaranteed rate in an environment where rates are generally expected to increase.
So with that being said what mortgage is right for me?
The variable rate mortgage is right for a client that is:
The Fixed rate mortgage is right for a client that:
As you can see there is no definitive answer as to which rate that every client should go with. But if you have a better understanding of what to look for and what you are comfortable with, the option you choose can be very beneficial. I will be there to help you understand your options and figure out a mortgage product that will suit your needs and your plans for the future.
The mortgage process can be a mystery to some people and even the mention of the word mortgage can be puzzling. I wanted to break apart the core aspects of a mortgage so that everyone out there can understand exactly what a mortgage is.
A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your property. When the full mortgage is paid off the registered loan is then removed off of the title of your property.
The mortgage options out there are almost endless which is why I am here to help guide you into a mortgage that fits your needs. Some things you are going to look for: what are my interest rates fixed or variable, do I have options for porting my mortgage, what are my prepayment options, and should I have an open or closed mortgage. Don’t be alarmed if you don’t know what some of those options are. That is what I am here for to make the home buying experience comfortable and informative. If you have any questions or are interested in financing for a home please don’t hesitate to give me a call!
For children, the excitement of moving into a new home is often clouded by uncertainty. Parents can ease the transition — starting at the dinner table. The ritual of sitting down to a family meal can help kids start to feel at home, says Nancy Darling, a psychology professor at Oberlin College in Oberlin, Ohio. “When kids feel like everything is changing, they need that stability,” she says. “They need attention and stability.” That may mean anything from choosing familiar paint colours in the new house to letting kids be part of decorating decisions.
Barbara Miller, an interior designer in Portland, Ore. who has moved with her children three times, painted their new rooms the same colour as their old ones.
“I try to keep things as much the same (as possible) — especially if they’re nervous,” says Miller. Moving can be more disruptive for kids than parents realize, says Doug Tynan, a child psychologist with the Nemours Foundation in Newark, Del. Be prepared to handle tears or unusual behaviour as children adjust to their new setting, he warns. “Don’t take it personally if they walk into a wonderful new house and burst into tears,” says Tynan, who estimates it takes five to six weeks for children to adjust to a move.
He recommends that parents talk openly with children about the move as soon as they decide it’s going to happen. “The more information the better,” he says. “Be as upfront as possible.”
Tynan, Darling and Miller offer these additional tips to help children adjust to a new home:
Source: Centum Mortgage Choice Corp.