October 1st was the day that you can open a Personal Real Estate Corp, or PREC. Great. However, what does this mean for you as a Realtor trying to get a mortgage?
That’s where things get…. interesting.
Here is how we qualify Realtors today:
When a Realtor wants to finance a property, if they have less than 20% down payment, we use a 2 year average of the Line 150 income from their personal income taxes. Take Tony. Tony makes $255,000 in 2019 GROSS commissions, and $220,000 in 2018. Tony has expenses. An assistant, his car, advertising, etc., and at the end of the day Tony’s 2019 NET LINE 150 is $105,000 and 2018 is $95,000. Great. That is $100,000 average, and that’s what we use.
(Very few lenders allow me to bump this up by 15%, but some do, in case of emergency).
Using $100K, Tony can qualify for 4.5x income with less-than 20% down, and 5.5x income with 20% down or more. Ta-dah, here you go Tony, you have a mortgage!
What if Tony becomes incorporated?
Incorporating can be a great thing (speak to your accountant). I know, because I’m incorporated for a very long time (speak to your accountant) and I have benefitted in various ways (don’t ask me, speak to your accountant). However, from a qualifying for a mortgage perspective, here’s where it might get tricky:
Lenders use a 2 year average of income to qualify. And the whole POINT of incorporating is to show less income, and pay less taxes.
So if in 2020 Tony decides to incorporate and his GROSS commissions are in and around $225,000 (Tony’s doing great, consistent performer!), but Tony pays himself a salary of $45,000 (and runs all expenses through the corp) – then guess what? Tony will now only qualify for 4.5x of $45,000!
Poor Tony. Now he can’t buy a property in 416. Or 905. Maybe 519? Probably not.
All joking aside, when you incorporate you have to figure out what your master plan is for the next 2-3 years with your mortgage financing. Since if you pay yourself less, the lenders might think you’re making less.
And then you can borrow less.
And in this market, that’s no good.
SOME DISCLAIMERS HERE:
- REALTORS are a different bunch than most other self-employed people in the eyes of the lenders. If we can show a consistent history of making income, we can definitely try and get an exception only with 20% down or more
- SOME lenders with 20% down or more will use corporate income PLUS personal income to qualify. Yay. Awesome. But they are harder to deal with. Boo! Not awesome. Or more expensive. Really not awesome!
- The more property you own, the harder it gets.
- Lenders look in the past not future so if you plan on incorporating AND buying a property in 2019 or early 2020, do it before you show your 2020 taxes (sometime in 2021 when the world is back to normal).
- I am not an accountant. I don’t even play on TV. I am just giving you the mortgage goods. Speak to an accounting professional about your taxes.
Thanks for reading and let’s all wish Tony a safe and happy end of the year. And you also! (No I am not stopping writing, just acknowledging we won’t be talking about Tony anymore)
As always, hit me up with any questions to firstname.lastname@example.org and 416-910-4448