How to get mortgage when working in your family business

You did the right thing.

You parents opened up shop when you were younger, you finished school, and decided to join the family business. You are paid salary, just like every other employee in the business, with deductions, and income tax payments, but when time comes for you to purchase a home, your bank tells you that you don’t qualify for a mortgage. Why does this happen, and what needs to be done in order for you to purchase a home with a 5% down payment when working in your family business?

The purpose of this blog entry is to provide prospective Edmonton homeowners who currently work for a family business with the information necessary to qualify for a mortgage, and provide step by step instructions for someone working in a family business.

How to qualify for a mortgage in general

We have discussed mortgage qualification in depth before here, here, and here, but here is a quick breakdown of how a person qualifies for a mortgage in Alberta. In order to obtain a mortgage in Alberta, prospective homeowners need to prove 3 things:

that they pay their bills on time -by way of a credit check
that they make enough money to support their existing debts + the cost of owning a home -by way of a job letter, pay stub and possibly more documents
that they have enough money for the down payment and closing costs related to purchase a new home -by way of bank statements

For most people, satisfying these three requirements by way of the 3 above mentioned documents covers all three categories, but for those working in a family business, the documentation required to confirm income goes up.

How to qualify for a mortgage when working for a family business

Those three basic criteria are again in place for those working for a family business, however, income verification requirements are a little different. Instead of providing a snapshot of your income today (by way of a job letter and pay stub), for those working in a family business, income is verified by way of a job letter, pay stub, AND copies of your last 2 income tax returns. The rationale behind the added income verification requirements is fairly straightforward; if you’re working with your family members, and in December decide that you want to buy a $500,000 home with a 5% down payment, but based on your November pay stub you aren’t making enough to qualify for it’s mortgage, your family could simply raise your pay in January, and issue you a pay stub and job letter for enough income to qualify -for someone not working for a family business, a change in pay like this just isn’t possible.

Since incomes can be changed in a family business, mortgage lenders offering 5% down payment mortgages require 3rd party income verification by of income tax returns. In order to qualify for a mortgage when working for a family business, you’ll need to provide your mortgage broker with copies of your last 2 year’s income tax returns. On those returns, your mortgage broker will be looking for your LINE 150, net income, and qualify you based on the 2 year average income (or if the most recent year is lower, just the lower year’s income).

If you are unable to qualify on the basis of 2 year’s income tax returns (because you haven’t been working there for 2 full tax years, or because you’ve been receiving steady increases in pay), there are still options, however, they require more down payment, and sometimes these mortgage lenders will require even more paperwork.

In most cases, if you are unable to prove your income by way of 2 year’s income tax returns, you’ll need to demonstrate your income by way of 6 month’s bank statements, and 6 month’s pay stubs. The mortgage lender will want to verify that your pay has been consistent. Down payment requirements can go anywhere from 20% down to 40% down, depending upon the income documentation you’re able to provide. More verification of the income needed to qualify for your mortgage generally equals less in the way of down payment.

Down payment and credit requirements are no different for someone working for a family business, or elsewhere.

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About the author

Anuj Gupta, BComm

Anuj was born and raised in Edmonton, and has been a broker at Alberta Mortgage since 2005. With a Bachelors of Commerce degree from the University of Alberta, Anuj has been helping Albertans become first time homeowners, and helped Alberta Homeowners save money on their mortgages for over a decade.