This is the first of a series of articles to educate self employed people about their mortgage options and to show them how we at Mississauga-mortgage.com can help them.

Some general comments:

Most self employed people do not know what their mortgage options are and what they need to do to prepare themselves for a mortgage.  As a result they leave themselves vulnerable to less than best products from their bank or mortgage broker.  Thus, it is vitally important that self employed applicants are empowered in the mortgage process.

It might sound unbelievable, but in some cases it is actually easier to get a mortgage for a self employed applicant than it is for an employed person.  This is because salaried or hourly paid applicants are restricted to the exact income that they earn.  Self employed applicants have more options, because of the nature of self employment.

Preparing yourself for a mortgage:
Here are a few things that you need to do

1. Contact Jacques du Preez at mississauga-mortgage so that we can do a full mortgage analysis for you.  This includes a mortgage pre-qualification.
2. Register your business.  Don’t just operate on a HST number.
3. Make sure that your business is more than two years old.
4. Make sure that your credit is good.  Good credit is more important than income for mortgage qualification.
5. Make sure your business is visible.  Here are a few ways that you can do this:
   a) Website
   b) LinkedIn
   c) Online directories such as 411.ca
   d) Facebook
   If lenders cannot find your business on the web they question the legitimacy of your income.
6. For a property purchase: have 10% down payment for a purchase and an additional 1.5% closing costs.  This must come from the applicant’s own resources.  It cannot be borrowed.
7. For a refinance: have at least 15% equity in your property
8. Make sure that your income taxes are paid up to date.

If you have not done all of the above for your business we can still get you a mortgage at competitive rates, but if the above is completed we can get you the best mortgage with the best rates and conditions.  At Mississauga-mortgage we specialize in mortgages for self employed applicants.

As we mentioned in the previous blog, Joe & Mary have two obstacles that they have to overcome:

1) They will have to come up with equity to bring their mortgage below the maximum of 95% of the value of the property. (95% of $90,195 = $85,685.) However, their mortgage balance at renewal is $86,498, so they will have to pay in $86,498-$85,685 = $813 in equity to qualify for the mortgage.
2) Mortgage insurers such as CMHC and Genworth will not insure borrowers who have credit scores below 620. As I stated before, any mortgage that has a Loan to Value (LTV) higher than 80% is a high ratio mortgage and prime lenders will require it to be insured with a mortgage insurer. Thus, if Joe & Mary, or one of them, have damaged their credit so that their credit scores are below 620 they will no longer qualify for the mortgage insurer’s requirements and thus neither for a mortgage.

From all of this then we can see the following:

1) If your mortgage renewal is four or five years from today then you should have enough equity in your home to qualify for a mortgage. If your mortgage renewal is in 2009 I suggest that you do some estimations of your property value and then calculate your Loan to Value to ensure that it is below 95%. If it is above 95% make sure that you have access to equity to make up the difference. You will be able to borrow the difference, but only if your debt service ratios are not too high.
2) More than equity in our homes it is essential that we know how our credit works, what damages it and what builds it. Your credit worthiness is more important that your income! (Have you though why?) Check equifax.ca regularly to see the status of your credit. Although the report that you as a consumer sees at Equifax does not disclose your actual credit score it gives enough information that will enable you to judge your credit worthiness. If Joe and Mary have damaged their credit scores then no prime lender will borrow to them and they will be in default of their mortgage.

Their are many things that I could not mention here, just because there is not enough space for it. Things like debt service ratios and various options available to you through a mortgage broker (that banks don’t offer) are very important, but we ran out of space. It would be my privilege to meet with anyone who requires more information and a solution. You can compare other scenarios to determine your best mortgage options here.

Let’s use numbers that are easy to work with so that we can understand the concepts rather than having to struggle with the math:

Joe & Mary purchased a $100,000 home in Mississauga, in 2006 with a 5% down payment. They worked with a mortgage broker to get them an excellent 5 year mortgage rate of 5.09%. The math would be as follows:
Purchase Price: $100,000
Minus Down Payment: $5,000
Balance: $95,000
Plus Mortgage Insurance: $2,612.50
Final Mortgage Amount: $97,612.50

Let’s assume the following about the housing market over the five years of their mortgage term:
2006 & 2007 – Market appreciated by 5%
2008 & 2009 – Market depreciates by 10% per year
2010 – Market appreciates by 1%
Thus, after 5 years and at the time of their mortgage renewal, their Mississauga home would have an approximate value of $90,195. Equally, Joe & Mary would have an approximate mortgage balance of $86,498 (assuming they paid monthly and nothing extra). This means that their new mortgage would have a Loan to Value (LTV) of 95.9%

FYI: LTV = Mortgage Amount/Property Value ($86,498/$90,195 = 95.9%)

This presents at least two potential problems for Joe & Mary:
1) In Canada we don’t have insured mortgages with less than 5% equity (They only have 4.1% equity).
2) They would have to re-qualify for both the lender and the mortgage insurer’s requirements.

In the next blog we will look at their qualification criteria and how this could cause them to lose their home and what they can do to prevent this.

Stay tuned….and let me have your questions and comments.

Well we have all seen the reports that property prices are declining.   Although we know the press likes a good story, and declining property prices do make a good story these days, there is truth to property values decreasing, by how much in Mississauga, that is not clear.  Even if only half the stats are true about declines, as home owners in Mississauga it is still prudent to reflect on how this might affect us.  I hope this helps you to review your mortgage status so that you don’t stand a chance of loosing your home when it comes to refinancing time.  This is particularly applicable to those of us whose mortgages are up for renewal in 2009 or 2010.

If you have more than 30% equity in your home and your credit is good you should not have a problem getting a mortgage.  However, if you have less than 20% equity in your home I will write a series of articles to help you protect your home, which is probably your greatest asset.  Stay tuned for more shortly or give me a call to discuss!