Mark is a self-employed contractor in Vancouver who earns $150,000 per year, but his reported taxable income is only $50,000 due to business write-offs and tax deductions. His wife, Sarah, is a real estate agent who earns commission-based income that fluctuates from month to month.
They want to purchase a $900,000 home with a 20% down payment ($180,000). However, despite their strong actual earnings, several banks declined their mortgage application because:
- Low Reported Income: Banks use Mark’s taxable income ($50,000) instead of his actual earnings ($150,000).
- Irregular Commission Income: Sarah’s fluctuating commission cheques make it difficult to prove steady earnings.
- Strict Debt Servicing Ratios: They do not pass the bank stress test due to their lower reported income.
How a Private Mortgage Helped
Since major banks and even “B” lenders required two full years of high taxable income, their mortgage broker suggested a private mortgage as a short-term solution.
✅ Loan Approved: A private lender approved a $720,000 mortgage (80% LTV) based on the equity in the property, not their income.
✅ Flexible Qualification: The private lender used bank statements and gross revenue instead of requiring full tax returns.
✅ Interest-Only Payments: They were given a 1-year interest-only mortgage at 9%, which kept their monthly costs lower.
✅ Fast Approval: They received approval in 7 days, allowing them to secure their dream home without waiting years to qualify with a traditional lender.
The Exit Strategy
Because private mortgages are short-term, they needed a plan to transition to a lower-cost mortgage:
- Increase Taxable Income: Mark adjusted his business finances to report at least $100,000 in taxable income for the next tax year.
- Track Commission Stability: Sarah ensured her commission income was documented properly and saved large deposits to prove steady earnings.
- Refinancing with a “B” Lender: After 12 months, they qualified for a B-lender mortgage at 6.5%, reducing their interest rate.
- Transitioning to a Prime Lender: After another 2 years, they met bank qualifications and refinanced into a 5-year fixed mortgage at 4.2% interest.
Final Outcome
- Without a private mortgage, Mark and Sarah would have been forced to rent longer or wait two more years before qualifying for a traditional mortgage.
- With a private mortgage, they bought their home immediately and transitioned to better financing once their income met traditional lender requirements.
- Increased Property Value: Over the two years, their home appreciated to $1,050,000, giving them more equity.
Key Takeaways
- Self-employed and commission-based borrowers often struggle with bank mortgage approvals due to income documentation challenges.
- Private mortgages provide a bridge to homeownership while borrowers adjust their income reporting or business finances.
- A clear exit strategy is crucial—using a private mortgage to transition to a “B” lender and eventually a prime lender can save money long-term.
Summary
Mark, a self-employed contractor, and his wife, Sarah, a commission-based real estate agent, struggled to secure a mortgage due to their low reported taxable income despite strong actual earnings. Traditional lenders declined their application for a $900,000 home due to strict income verification requirements. A private mortgage provided a solution, offering an 80% loan-to-value mortgage at 9% interest based on bank statements and gross revenue rather than tax returns. This allowed them to purchase their home immediately while adjusting their income reporting. Within a year, they refinanced with a B-lender at 6.5%, and after two more years, they qualified for a prime lender at 4.2%. This strategy enabled them to achieve homeownership sooner, benefit from property appreciation, and transition to lower-cost financing over time. Their case highlights how private mortgages help self-employed and commission-based borrowers bridge the gap to traditional financing.
