Recently, I was asked to give a presentation on mortgages for small business owners and entrepreneurs. I also thought it would make an excellent blog.
For both a personal mortgage or a commercial mortgage:
- You are going to need to keep your credit in excellent shape to get a decent mortgage both interest rate wise and terms.
- You actually have to claim income. Lenders will look at line 150 of your last two tax assessments.
- Your financial statements and balance sheets will be reviewed by a lender. These should be up to date and current.
- Currently, a traditional lender will give an entrepreneur a mortgage between 65% to 75% land to value on any purchase.
- You have to meet the new stress test interest rate that rate today is 5.14%
- You are still required to meet debt service ratios. These ratios may not be as strict as lenders will look at your total equity but be prepared to explain any substantial credit you are carrying.
Seven Things You Must Do To Keep Your Credit Rating Strong
- Pay attention to credit card balances
- Get rid of the array of lingering credit card balances
- Don’t have old accounts removed from your credit report
- Do your rate shopping within a short time frame
- Pay bills on time, every time
- Pay off all judgments and liens
- Avoid the indirect threat of risk to your credit
You need to learn to manage your revenue as an entrepreneur; you need to consciously maintain your debt and credit standing.
The Documents That You Will Need:
- A Net Worth Statement outlining your assets and liabilities
- Tax Returns and Notice of Assessments for five years.
- Accountant’s reports for five years for your businesses and personal income tax
- Articles of Incorporation
- Foreign Assets Disclosure
- Be able to explain any anomalies in any of the document.
Your documents should be able to make them available electronically and hard copy form.
So you want to apply for a Commercial Mortgage:
- 70% of all commercial loans default in Canada ( REIN).
- Given the above, lenders are very cautious before they give any business a mortgage.
- Be prepared to be asked for a personal covenant
- Personal covenant is a personal asset or assets.
- Your down payment will depend on your credit, personal covenant, type of business and land type but on average expect to put down 25%.
- Be prepared for a lengthy approval process. 3+ months
- You will be required to provide an appraisal
- You may need to do an environmental assessment report on the property.
- You will need to illustrate that the business can handle the mortgage; be prepared to show that for the amount you are borrowing, you have revenue that can exceed 1.25% of the loan amount.
You may have great credit, but lenders have enough deals to keep them busy. They are not waiting for you to apply and trust me; they are not going to think your business is unique. Lenders are very cautious, and you are going to need the patience of Job to get through the application process. However, if you are organized and up to date on your filings, the process will go smoother. Further, they will not care if you have gotten a loan in the past.
My goal is not to discourage you but to keep your expectations in check!
What if my credit is only so-so?
- You need to manage your debt in your business as you do your business development.
- You need to anticipate your downswings as best a possible.
- You need to apply for a new loan before your revenue collapses.
- However, if you didn’t do these things, it is not all lost….there always PRIVATE LENDING.
So you should not be discouraged if your business had a downturn and you are overextended. There are lenders that are willing to help out.
The reality is as a self-employed person; you need to be organized, claim income and file your taxes. Once you establish a good credit history, it will become more comfortable for you. Further, as your business grows more affluent, there are great lending opportunities for you that will afford you the opportunity to pay down your debt quicker.
Want to sit down and talk to learn more, let’s have coffee! I’ll buy the coffee. 519-965-8150.