Why April is a critical time for self employed applicants

Mortgagenomics Canada

If you're self employed and qualifying for a mortgage right now (April), you are either gleaming with optimism or white knuckling your way to the finish line. And here's why...

When qualifying as a self employed applicant, your qualifying income is determined from your most recent 2 year average (of your Notice of Assessments). Notice of Assessments are the end confirmation of your tax process...it's like a receipt, or final bill of sale. Lenders request it because it is the most firm verification document for self employed applicants. It also verifies whether the qualifying mortgage applicant has taxes owing...and if so, the lender will require that the balance outstanding is paid in full. On the other hand with non-self employed applicants (who receive income that is already deducted at source from their employers), Notice of Assessments are less often required when qualifying for a mortgage unless the applicant is relying on some type of additional variable component to their income like overtime, bonuses, or commissions. But even in these rare instances, for a non-self employed applicant, the more likely request from a lender would be prior-year year-end pay stubs or T4s...and remember, this is only if the non-self employed applicant even needs the additional variable component income to qualify. So, let's say the applicant qualifies comfortably with a $60,000 salaried income (without commission, overtime or bonuses)...in this case, a recent pay stub and employment letter would suffice.

So up until now (April), self employed applicants have been qualifying based on a two year average based on 2019 and 2018 (because 2020 tax returns are still being filed - the deadline is April 30). This is a critical time if you are banking on your 2020 Notice of Assessments to prop up your two year average, or perhaps you are urging your qualification ahead to avoid the real-time two year average, of 2020 and 2019. Either way, the lender will ultimately make the decisive call...as we evolve further into 2021, the lenders will eventually reject the year 2018 and come to only expect 2019 and 2020 as the benchmark years.

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