I have often heard from entrepreneurs that it is difficult to obtain a mortgage to buy a home. Business owners can be viewed as a higher risk than the typical employee. As a result, obtaining financing at a preferred mortgage rate is challenging.
Here is a list of my favourite mistakes to avoid:
1. Failing to Plan Ahead
There are many factors to consider when you’re buying a house. You’ll need to coordinate your corporate tax plan, your personal income levels to qualify for a mortgage as well as your personal tax situation. Failing to plan can lead to painful tax bills and less than ideal mortgage arrangements.
2. Not Paying Yourself Enough
Let’s be honest. A huge benefit of being incorporated is having the ability to keep your personal income low and defer that personal tax bill. Many entrepreneurs pay themselves only what they need to live on. If you’re planning a significant purchase of a new home, that previous personal income may not be high enough to qualify for a mortgage on the home that you want. Consider what your income needs to be in order to afford that home you’re hoping to purchase.
3. Paying Yourself Too Much
Perhaps you’ve opted to inflate your personal income because you wanted it to be high enough to qualify for a mortgage. You report a giant dividend from your company that resulted in a large deficit in the equity section of your balance sheet. Sadly, your mortgage broker is going to see that you’ve declared income that you actually didn’t have and you aren’t going to get that mortgage.
4. Giant Spikes in Draws from Your Corporation
You’ve paid yourself a minimal salary and all of a sudden, you need to draw substantially more to be able to pay the down payment for your house. You’ve typically paid yourself $60,000 annually but suddenly need $250,000. This giant spike may put you in the most unfavorable personal tax brackets when you were barely utilizing the pleasant brackets in previous years. For tax purposes, you’re far better off smoothing out the personal draws over a number of years. In this example, take $155,000 each year instead of $60,000 then $250,000.
5. Failing to Pay Yourself Consistently
Dividends or a salary doesn’t really make a huge difference in the mortgage realm as long as you’re relatively consistent about your compensation plan.
6. Not Participating in the Home Buyers Plan
If neither you nor your spouse have lived in a home that you’ve owned in the last four years, you may qualify to use your RRSPs under the Homes Buyers Plan (HBP) as part of your down payment. After March 2019, CRA allows you to withdraw up to $35,000 for your down payment. Be sure to check out the CRA website for the latest criteria and rules around this program. Don’t have $35,000 in your RRSP yet? Bump up your wage from your corporation and make a contribution to your RRSPs. Have this money sit in your RRSP account for at least 90 days before you withdraw it under the HBP in order to get the deduction on your personal tax return.
7. Not Filing your Personal Taxes
Your mortgage broker will need a copy of your personal tax return along with your Notice of Assessment. Not having this paperwork readily available can delay approval of your financing and potentially cost you your dream home.
8. Not Paying Your Personal Taxes
Your mortgage broker will require proof that your personal taxes have been paid as part of your mortgage application. If you’ve paid yourself a giant dividend from your corporation in order to get that income high enough to get the mortgage but now can’t afford the personal taxes on the dividend—you’re still not getting your mortgage.
9. Not Hiring a Qualified and Experienced Mortgage broker
Not all lenders are the same. As an entrepreneur, you have unique circumstances that take a specific skill set to fully understand. Example: My client is an owner of a successful trucking operation. He wanted to buy a vacation property and the mortgage representative at his bank was not cooperating. I supplied my client with a list of my top mortgage brokers and he had his financing arranged within the week.
Do you need help creating a corporate plan with homeownership in mind? We’re happy to help!
Angela Richardson is a Chartered Professional Accountant (CPA, CGA) with more than 17 years experience working in public practice with small to medium sized businesses. While financial statements and tax returns are part of the occupation, consulting and assisting clients to achieve their entrepreneurial dreams is her true passion.