The Self-Employed Borrower With Declining Net Income
Priya runs a design studio as a sole proprietorship. She wants to buy a $640,000 condo with 20% down, requiring a $512,000 mortgage. Her accountant prepared two years of returns: gross revenue of $210,000 and $195,000, but net income after expenses of $61,000 and $48,000. She also takes $30,000 in dividends from a holding company that holds her investment portfolio. Her credit score is 742. She has $18,000 in a TFSA and $40,000 in the holding company. She insists her "real" income is over $120,000 and asks the broker to present it that way to the lender.
1. How should the broker assess Priya's qualifying income, and why is her stated figure problematic?
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Lenders qualify self-employed borrowers on documented net income, typically averaged or using the most recent year depending on trend. Priya's net income is $61,000 then $48,000 - a declining trend. Averaging gives about $54,500. The $30,000 in dividends may be addable only if it is recurring and documented as personal income, not retained in the company; the broker must verify the T5 or corporate records rather than assume.
Her claim of "real" income over $120,000 likely refers to gross revenue or cash flow before business expenses. That is not qualifying income. Presenting gross revenue as income to a lender would be a misrepresentation, potentially constituting fraud and a breach of the broker's licensing obligations.
The correct approach is to present the documented figure, explain the declining trend, and let the lender apply its policy. If the file does not qualify at $512,000, the broker should discuss a larger down payment, a co-borrower, or a lower purchase price - not inflate income.
2. Priya asks the broker to "just tell them I make $120,000." How should the broker respond, and what are the consequences of complying?
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The broker must refuse clearly and explain why, without moralizing. The response: "I can only submit income I can document. Your returns show net income of $48,000 last year. If I submit $120,000, that is a false statement on a credit application, and both of us face consequences."
Consequences of complying include: the loan could be recalled or the lender could demand immediate repayment if discovered; the borrower could face civil liability and, in serious cases, criminal exposure for fraud; the broker faces disciplinary action from the regulator, possible licence suspension or revocation, and civil liability to the lender. The broker's professional obligation is accuracy and integrity in every document submitted.
The constructive path is to reframe the problem: can the purchase be restructured to fit documented income? Options include increasing the down payment using the TFSA and holding-company funds (subject to tax consequences), adding a co-signer with verifiable income, or choosing a less expensive property. The broker should document the refusal and the alternatives offered in the file.