Financing Question - Permanent Employee VS. Contract Employee VS. Business Owner

[Nir]

Hi All,

I understand when purchasing a 4-plex you can usually put 10% down CMHC insured when you have good employment income as a permanent status employee.

Can you also put 10% down assuming the same income but income is from a business you own that exists 2 years or more? OR when only source of income is business, you usually have to put more down?

Same question when you are a contract employee instead of permanent status?

Please assume all 3 have same good income (say $100,000), same length of time (say 2 years), same good credit score (say 750).

THANKS.

 

[kboughen]

QUOTE (investmart @ Oct 18 2009, 08:50 PM) when purchasing a 4-plex you can usually put 10% down CMHC insured

When purchasing a 4-plex with CMHC the minimum you can put down is 10% and all guidelines must be met.

It doesn`t matter how high the income is, it is the TDS that counts (the income to debt ratio). When calculating the TDS, your income falls into 1 of 2 basic categories;

1) A permanent full time salaried employee; if this is the case, your income for the TDS calculation is your salary.

2) Self employed, business owner, or commissioned employee; if this is the case, your income for the TDS calculation is the average taxable income from these activities for the last two years (typically Line 150 from your tax return). Unless the most current of the 2 years is lower, if so the lower number may be used.

Calculations, guidelines and fees can be found here; http://investormortgages.zoomshare.com/files/CMHCrental.pdf

 

[Nir]

Thank you Kevin.

If business is a corporation I`m assuming it`s Gross Revenue line 480 instead of line 150 from tax return(?)
(or I guess the same - total revenue GIFI 8299 in another section of the Corp. tax return form)

Regards,
Neil

 

[kboughen]

QUOTE (investmart @ Oct 19 2009, 10:12 AM) If business is a corporation I`m assuming it`s Gross Revenue line 480 instead of line 150 from tax return(?)
Hi Neil,

If the business is a corporation, your personal income is the income you personally draw from the corporation which is typically confirmed with a T4 slip and Line 150 from your personal tax return.

 

[Nir]

QUOTE (kboughen @ Oct 20 2009, 07:51 AM) Hi Neil,

If the business is a corporation, your personal income is the income you personally draw from the corporation which is typically confirmed with a T4 slip and Line 150 from your personal tax return.

Interesting. I thought if you have a corporation you own, then the bank looks at you and the corporation as one for the purpose estimating your income as part of your mortgage application. In other words, I thought from the banks point of view, total income in this case = personal income (line 150) plus corporate income (line 480).

 

[MikeMcCrae]

When buying residential property with less than 5 units the lenders use your personal income. (Line 150) But in the case of a business for self client they will accept "stated income" if it can be verified by company financials. Lately though I have not seen the lenders do a stated income for revenue property.

 

[kboughen]

QUOTE (investmart @ Oct 20 2009, 03:25 PM) the bank looks at you and the corporation as one for the purpose estimating your income as part of your mortgage application.
A 4-plex falls under the CMHC Small Rental Program, many Lenders allow you to purchase in the corporations name but will typically require you to personally guarantee and qualify based on your personal income (Line 150).


If you are purchasing a 5-plex or more, you fall under the CMHC multi family program where the majority of focus is on the property, and less on you and your personal income. With these types of purchases, your overall corporation income will be considered by the Lender.

 

[Nir]

QUOTE (kboughen @ Oct 21 2009, 06:08 AM) A 4-plex falls under the CMHC Small Rental Program, many Lenders allow you to purchase in the corporations name but will typically require you to personally guarantee and qualify based on your personal income (Line 150).


If you are purchasing a 5-plex or more, you fall under the CMHC multi family program where the majority of focus is on the property, and less on you and your personal income. With these types of purchases, your overall corporation income will be considered by the Lender.
Thank you Kevin,

It is interesting that if for example you own a successful corporation making $1,000,000 a year, with $1,000,000 net worth, and therefore you are not working as an employee, then you do not qualify for CMHC insurance on a 4-plex, because line 150 = zero. weird, isn`t it?

 

[kboughen]

QUOTE (investmart @ Oct 21 2009, 10:00 PM) if for example you own a successful corporation making $1,000,000 a year, with $1,000,000 net worth, and therefore you are not working as an employee, then you do not qualify for CMHC insurance
Hi Neil,

It is interesting, although I believe the intent of the CMHC Small Rental Program is to assist an individual in purchasing a small rental property (singles to 4-plexs), this would explain why the rules and guidelines are designed around individuals purchasing these types of properties.

A Corporation with a Million dollars in annual profit will have many other financing options available (such as the CMHC multi family program); so, I think it would be reasonable if the Small Rental Program was not available to them. Of course I don`t make the rules; I just try and find solutions within the rules.

 

[Nir]

Change 1 million in the example to $100,000 and you get an average individual owning a corporation instead of being an employee. as you said we don’t make the rules. Thanks.