The self employed mortgage market or business for self as its come to be known, is a continually growing segment of the overall mortgage market as more and more people move to self employment either by choice or through force via layoffs, downsizing, etc.
In recent years, the banks and other institutional lenders made a considerable play towards securing more of this available market share with mortgage programs that could be qualified for without a great deal of proof with respect to your ability to repay.
That has changed significantly with mortgage rule changes tightening up on business for self mortgage programs causing some of the main line lenders to either significantly revamp their programs or drop them completely.
Much has been written about all this and how it is now more difficult and potentially more costly to get a self employed mortgage, especially if you are relaying heavily on a stated income approach.
While the rule changes will continue to cause some transitional problems for some, lets focus in for a minute on the essence of the rule changes.
The reasoning for tightening up mortgage requirements for the self employed was that the financing being provided at times was not always reasonable with a borrower’s ability to repay the mortgage, or it at least wasn’t very clear.
Matching borrowing risk to lending decisions is important to the borrower, the lender, and the industry as a whole.
So any changes that are made that move towards being able to more accurately assess risk is likely going to help protect this form of lending for the long term.
With stated income mortgages there is now a greater requirements to 1) prove you are making the money stated, 2) prove that a history of this type of earnings cash flow exists, and 3) prove that what you’re making now will continue into the future.
Lenders are also looking at industry statistics related to what different occupations make to better gauge what a reasonable range would like be if income cannot be fully verified.
So, yes, there is now a greater burden of proof on the self employed borrower to support their income claims. This can also be done through a variety of different ways that will depend on your specific business and the work you are preforming. For instance, active contracts and outstanding purchase orders are further support of on going cash flow. Business financial statements including accounts receivable details can further build the case.
While the lender focus is typically going to be related to the money you took out of your business, the overall business performance is still going to be important.
Bottom line is there is more work involved in getting the best rates possible for business for self mortgages and some of this additional work can translate into more record keeping and forms of disclosure that help support your application.
With some additional work to better prove your earnings, lower rates are still available which makes the process of getting the lender more comfortable with your stated numbers worth it in the long run.
If you’d like to better understand your self employed mortgage options as well as get some expert assistance in building an effective financing package, then I suggest that you give me a call so we can go over your situation together and discuss the different approaches you can take.
As a private mortgage broker, I am constantly getting calls from both consumers and business owners to locate and secure private funds for different applications.
The amounts we place range from $30,000 to several million dollars and placements can be in first, second, or even third position.
Even though we deal with a large number of private investors and lenders, every lender has their own lending and funding requirements and every lender, for the most part, is in and out of the market in terms of having funds to deploy.
So there is always opportunity to invest.
The key is matching the funding request with the lender requirements and criteria. This is where me and my team come in.
We work hard at understanding the needs of all our lenders that wish to place their investment funds into private mortgages so that when the opportunities arise, we can quickly place the deal with the most relevant options available.
There are many investors that only focus on private second mortgages up to $100,000, others that focus on residential construction, and still others that are more interested in the larger commercial deals.
The bottom line is there is such a wide range of borrower demand its very likely we will have private mortgage investment opportunities that you may be interested in from time to time.
If you are new to private lending, this is a growing market space as banks and institutional lenders and federal regulators continue to tighten up on mortgage financing rules, pushing more and more deals, good deals, into the private lending space.
Because we work in the Ontario market where real estate is typically very strong, there is also a large interest in providing private loans due to the strength in the security.
Most mortgages that we place are for a period of one year. Terms can be longer depending on the lender or investor’s comfort in the deal and investing criteria.
Private investing is one of the easiest investment portfolios to get into due to the limited amount of knowledge required to invest and the minimal amount of regulation related to it.
If you would like to inquiry about private mortgage investment opportunities we are working on now, or in the future, then I suggest you give me a call at 416 464 4113 and we can set up a time to either speak on the phone or meet in person.
First of all, when we speak of a private mortgage investor or a private mortgage lender, in most cases they are one in the same.
The only times when you could potentially draw a separation between them is when you are referring to something like a mortgage investment corporation where the corporation looks after investor funds and places those funds into private mortgages.
In that context, the mortgage investment corporation or MIC would be the private mortgage lender and the individuals providing funds for lending would be the private investors.
In almost all other cases, the lender and investor are the same.
So regardless of how we refer to it, the question remains the same…how does one get into the business of private mortgage investing/lending?
The answer to this has a few different layers and we will now explore.
First, from a regulatory point of view, there is no securities laws or special investment governance that is required to place a private mortgage. You don’t have to take a course or become qualified in any particular manner.
Second, the level of knowledge required to start investing in private mortgages is minimal as compared to any other type of investing. This type of investment vehicle is very straight forward to understand. And while it is always a good idea to consider the counsel of experts such as lawyers, brokers, real estate agents, accountants, and so on, you certainly don’t have to when making a decision to invest or not.
Third, there is no minimum cash requirement for investing in private mortgages. You can use cash or leveraged funds if you so choose.
The only real requirements that exist to become an investor in private lending situations is to 1) have money to lend or invest; and 2) be able to access the market for potential borrowers that meet your lending/funding criteria.
Now there can be a lot more that goes into being a successful private investor as with any type of investment vehicle, there is risk involved and losses can be incurred if risk is not properly managed.
But that is really a different discussion to get into as the focus of this article is how to become a private money investor in the mortgage market.
The most common method for investing in mortgages is through recruiting the right team of experts to support you.
The majority of private lenders work with mortgage brokers to source and administer deals, and with a lawyer to close and fund the deals as well as act on behalf of the investor if there are any legal issues that arise related to mortgages placed.
Selecting the right broker and lawyer will get you well on your way to becoming an active and successful private mortgage investor.
The key is in selecting individuals that have experience and a track record of successfully managing their client’s requirements.
If you would like to learn more about our private mortgage investing services for the private investors we work with, please give me a call and we’ll set up a time for a phone call or face to face meeting that works for both of us.
As of November 1st, 2012, the Bank of Canada 5 year bench mark rate is being used to qualify mortgage applications where the interest term is variable and/or less than 5 years in length.
For both new home purchases, and debt consolidations, and mortgage refinancings, this is having and will continue to have an impact on many Canadians looking for mortgage financing.
How The B20 Rate Is Set
Before we get into the direct impact, let’s define what the B20 rate is.
Every Wednesday the Bank of Canada sets the bench market rate which is derived from an average of the posted 5 year fixed mortgage rates of the major banks.
The newly calculated B20 rate on Wednesday is then released to the public on the following Monday, and then put into use by mortgage lenders until a new rate is calculated.
At the present time, the B20 rate is approximately 5.25% even though the actual borrowing rate to secure 5 year fixed terms right now is more than 2 percentage points less.
Impact Of B20 Going Forward.
The B of C bench mark rate now needs to be utilized when calculating an applicants ability to debt service on any variable term or any fixed term under 5 years.
Because the B20 is considerably higher than the actual rates available in the market place, many consumers are not able to meet the debt servicing requirements attached to “A” mortgage offerings or the only “A” offering they can qualify for is a 5 year rate, pushing the market place more and more towards longer term fixed rate mortgages.
Coupled with the recent changes to loan to value ratios where the maximum allowable mortgage from a federally regulated lender is 80%, the B20 rate makes qualifying for a mortgage refinance to consolidate debt much more difficult to achieve.
This will impact home purchases as well as home purchasers are more likely to adjust their sights on properties they can afford under the new rules.
With mortgage refinancing, its a bit of a different story.
In a refinance mortgage for debt consolidation scenario, the debt already exists and the mortgage holder is trying to bring down the cost of overall debt and term it out over a longer period of time. So with less refinancing options available, cash flow stress will be harder to alleviate.
For anyone looking for variable rate mortgage, the spread between the current market rates for variable and the B20 rate is about 2.5%, or almost double current variable mortgage rates which are mostly at prime minus 0.20%, or 2.80%. So to qualify for that variable rate, you have to be able to show debt servicing ability for the B20 rate which in many cases will be impossible to do.
The Long And The Short Of It
The better mortgage rates are now harder to qualify for.
On the flip side, if you can’t qualify for a specific “A” mortgage rate right now, there are several very good sub prime offerings on the market that can work in the interim.
The key right now for all mortgage holders or prospective home buyers is to really understand your financial and credit profile to see what you can qualify for, and if you can’t qualify for a mortgage with a bank or institutional lender then its going to be important to build a plan to get yourself into “Finance-able Position” to lower your rate in the near future.
The new rules are not likely going away any time soon, so there is going to be a period of adjustment.
Even if you don’t need a new mortgage today, you would still be well served to gain an understanding of the new rules and see how your current level of debt, cash flow, and credit stack up against them.
One of the best ways to do this is to work with an experienced mortgage broker who can not only help you understand the changes in the mortgage qualifying process, but also calculate the numbers for different scenarios so you have a solid plan of attack moving forward for whatever your future mortgage needs may be.
And while there still remains an ample supply for the “Business For Self” of self employed mortgages, the qualifying has become more difficult and the cost, in many cases, higher.
If we go back a few years, the self employed mortgage industry was tagged as major growth market by the primary mortgage lenders with virtually every lender coming out with their own set of programs both for verified income and stated income situations.
And for a period of time, it was almost too easy to gain access to a considerable amount of capital for mortgage financing, at excellent rates, without a whole lot of proof as to whether or not you were in a good position to pay it back.
But with the collapse of the sub prime market in the U.S. as well as Global financial problems have caused the Canadian regulators to to intervene on many mortgage rules and criteria, including stated income mortgages.
The result has seen many lenders completely abandon stated income programs and others putting more meat and qualifying requirements into the process.
This may be viewed as a case where the pendulum swung too far in favor of too easy an access to lower rate mortgages and that now we are in an environment where the market is providing mortgage services that more properly align with the related risk of a given transaction.
While this can come as a cost to many of the self employed, the changes made to date have also provided longer term stability to the overall market place and are in keeping with other mortgage changes that have been implemented to reduce overall market risk.
The good news is that supply of BFG mortgages remains solid. The bad news if you want to call it that is a larger percentage of these loans are being done in the secondary banking market where the cost of financing is going to be slightly higher.
Self employed individuals can still qualify for the lower available rates. It just won’t be as easy to qualify which has certainly put us into a period of adjustment.
What can also be confusing for business owners is figuring out which of the available stated income mortgages are best suited for them as there is quite a broad range of program offerings out there.
This is a good example of where an experienced mortgage professional can potentially add considerable value to your search for the right mortgage.
Working through all the different self employed mortgage programs is a much easier process to navigate with some expert assistance to make sure you’re not only getting the best deal available, but also that you’re setting up your mortgage financing to fit your projected cash flow now and in the future.
If you need assistance with stated income mortgage financing, I suggest that you give me a call so we can go over your requirements together and discuss the different options that are available to you.