The State of Stated Income

Self-Employed-Mortgages-WomenCanada has 2.67 million self-employed citizens, about 15% of the work force, says CAAMP.

Due to how they report income and deduct expenses, these individuals are frequently reliant on stated income mortgages.

A few weeks back, Bloomberg quoted Canada’s bank regulator, OSFI, as saying stated income mortgages “have some similarities to non-prime loans in the U.S.”

Just weeks before that, CMHC announced limits on bulk mortgage insurance, which lenders use to reduce risk on conventional mortgages.

Given these developments and heightened risk aversion in the industry, it’s not coincidental that mainstream lenders like TD, FirstLine, Scotiabank, Street Capital, etc. have tightened up—or abruptly eliminated—their stated income programs.

Various lenders (e.g., TD, MCAP, First National, Merix Financial, etc.) have also either increased rates for “stated” borrowers, or started charging insurance premiums on conventional “business for self” (BFS) mortgages.

“We’re applying increased due-diligence practices to all Equity Lending credit applications,” said TD on February 12. (TD applied these new rules equally to all of its mortgage channels—both retail and broker—unlike CIBC, which targeted just the broker channel with its new BFS restrictions.)

Boris-BozicA few weeks ago, we asked Boris Bozic, Founder/CEO of Merix Financial, how he saw the landscape unfolding for borrowers trying to qualify under BFS and equity programs.

“Firstly, they should be prepared to pay a premium,” he said, “be it in the interest rate or in the added cost of insurance.”

“Secondly, and I suspect this will have an even greater impact, self-employed borrowers will face a more rigorous adjudication process.  Leniency and exceptions to policy will be a thing of the past.”

Andrew-MoorEquitable Trust President/CEO, Andrew Moor, told us: “BFS borrowers are likely to value the services of a mortgage broker more than ever as a result of the changes in the market.”

He’s certainly right.

Whereas most banks scoff at uninsured 80% loan-to-value stated income mortgages, alternative lenders (which distribute mainly through brokers) offer self-employed financing solutions with:

  • far less paperwork
  • less hassle
  • longer amortizations (e.g., 35 years vs. 30)
  • allowance for secondary financing, and
  • often no lender fees or insurance fees for strong borrowers.

At present, higher-LTV uninsured BFS lending is the domain of brokers. Banks have far less foothold in this segment of the market.

Yes, the rates are higher than prime insured rates (e.g. 3.70% on a 3-year fixed versus 2.79%), but given the risk and relative ease of approval, the pricing is quite reasonable.

Nick-Kyprianou“I think the opportunities are very good for companies like us and Equitable and Home Trust,” Equity Financial Trust CEO Nick Kyprianou told CMT.

“Equity focuses exclusively on mortgage brokers, and self-employed borrowers are a large part of our business.”

“I think there have been many changes and there are more changes to come. I think brokers should be building strong relationships with companies like us because we are the companies that will be supporting mortgage brokers over the long term.”

Moor adds, “The changes in policies at some of the lenders, on balance, does seem to position Equitable Trust favourably. We have a strong interest and belief in lending to BFS borrowers – and believe that it is vital to the Canadian economy that these entrepreneurial individuals have good access to the mortgage market.”

Equitable says it’s seeing “a lot of interest” in its 85% LTV BFS product and expects that interest to continue with “fewer competitors focused on the space.”

Credit Unions are also filling some of the void. Toronto-based Meridian Credit Union is a good example. In many cases, Meridian levies no rate surcharges or insurance premiums for “non-income qualified” income financing up to 75-80% LTV. Some income docs are required, however. (Here’s a related CMP story.)


Consumer Note:  Despite tighter guidelines, uninsured stated income (or “equity”) mortgages are still available from prime lenders in the 50-75% LTV range. And you can still get near-best rates, depending on your business history, credit, assets, loan-to-value, etc. This is a case where a mortgage planner is absolutely essential for comparing all the terms from different lenders.

Prime lenders also still offer insured stated-income financing with only 10% down. The challenge is, lenders and insurers are applying more scrutiny to these applications than in the past. If you think you can state any income that strikes your fancy, just to get approved, you may be sadly disappointed.


Rob McLister, CMT

  1. I’m surprised more brokers don’t target this part of the market. 2.67 million is a lot of borrowers and there is almost no rate shopping or bank competition. Most NIQ clients are just happy to have a good solution at all!

  2. I think you’ll agree, we’ve seen this whole “stated program” tightening behind the scenes for some time now. I totally agree,If you think you can state any income that strikes your fancy, just to get approved, you should be sadly disappointed. That said, in all fairness to a sector that greases our economy, they definitely deserve FAIR common sense lending. If they simply shut it down, how does the saying go, “cut off you nose to spite your face” :(

  3. I’ve seen more new stated income restrictions in the last four months than I have in my whole career. It seems to be stemming from media hype and uninformed regulators. There are no default epidemics in this part of the market.
    Anyone who buys a marketable property with 10-20% down, has great credit, good assets, and proves that their business generates ample revenue, should be rubber stamped. There is minimal risk in those kind of deals.

  4. Banks like to have excuses to impose higher rates to borrowers.
    And if you check thousands of mortgages that have been given on way lower rates to a much less qualified borrowers.
    … for some to gain, many have to loose …

  5. Big impact on Self Employed Individuals but as before we will roll with the times. Policy will keep changing. We have to accept this.

  6. Another great post! In my opinion, this nothing more than a tax grab. You’ll now have to declare more income and pay more tax, if you want to qualify without additional premiums. It’s our sad reality.

  7. Hi Steve,
    Not many “A” lenders do stated income to 80% LTV without insurance. Meridian is one of them. On owner occupied properties it will do stated income to 80% LTV conventionally (no insurance premium), given a 680+ beacon. It will also go in 2nd position to that LTV. Conditions and some income documentation apply, so contact Meridian for complete details.
    Cheers…
    Rob

  8. The mortgage loan marketplace is subject to relatively frequent changes and adjustments, both in policies of lenders and in products provided by lenders to that marketplace.
    A lot of brokers complain when lenders restrict access to a product or reduce their exposure to specific types of risks. What they should do instead is celebrate the fact that it is in this area of the business that brokers EARN their incomes. By keeping current in the field, making sure that you always provide added value to your clients, you as a broker genuinely make a difference to your clients, in this case, your stated income or business for self client.
    Quit complaining, get on with it!

  9. EXPERTISE REQUESTED
    I am interested in speaking to someone familiar with the Toronto mortgage market for a project that I am working on. If anyone is willing, it would be greatly appreciated.
    Thanks
    Joe

  10. ‘what is your view on the Merrix 5 year closed mortgage/ 3.25% …i see Computershare is invlved …are there any drawbacks to dealing w/ this company, as opposed to say usual /traditional lending institutions,like banks/credit unions???am considering it..

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