The Self-Employed Borrower With Two Sets of Numbers
Owen is pre-approving a borrower, Ms. Chen, who owns a incorporated consulting business. She reports $145,000 in gross revenue on her T1 general but claims $96,000 in net income after business expenses. Her accountant has also prepared a letter stating her 'annual income is approximately $145,000.' She wants to buy a $750,000 property with 20% down and is asking Owen to use the $145,000 figure so she qualifies comfortably. Owen's lender uses a gross debt service ratio of 32% and total debt service ratio of 40%, and the stress-tested qualifying rate is 7.2%. Ms. Chen has a $480 monthly car payment and no other debts. She has been incorporated for 14 months and has two years of personal tax returns.
1. Explain which income figure Owen should use and why, and identify the risk in the accountant's letter.
Read the worked answer
Owen should use the income the lender can verify and that reflects the borrower's actual ability to service the debt. For a self-employed borrower, that is normally the net income declared on the T1 returns, with adjustments the lender allows (such as adding back non-cash deductions like capital cost allowance, or grossing up certain items). Gross revenue is not income; it is the starting point before the costs of earning it.
The accountant's letter stating 'approximately $145,000' is a red flag. It describes revenue, not personal income available for debt service, and it invites Owen to present a figure that overstates capacity. Owen should not rely on it as the basis for qualifying. If the accountant's letter is used at all, it should confirm the net income figure and any add-backs the lender permits, consistent with the returns.
Using $145,000 would produce a materially higher qualifying income and could push Ms. Chen into a mortgage she cannot comfortably carry. Owen's obligation is to qualify on documented, supportable income, not on the most favourable number available.
2. Calculate the approximate maximum mortgage payment Ms. Chen can support under the 40% TDS ratio at the 7.2% stress rate, using the income figure Owen should rely on, and comment on whether the purchase is feasible.
Read the worked answer
Using net income of $96,000: monthly income is $8,000. At a 40% TDS, total allowable monthly debt service is $3,200. Subtract the $480 car payment, leaving approximately $2,720 per month for the mortgage payment (principal and interest), before adding property tax and heating, which the lender also includes in the ratio.
At 7.2% on a 25-year amortization, a $2,720 payment supports roughly $380,000 to $390,000 of mortgage principal. Adding the 20% down payment of $150,000 on a $750,000 purchase, the required mortgage is $600,000, which is well above that range.
Even before property taxes and heating are added, the file does not appear to qualify on the documented income at the stress rate. Owen should tell Ms. Chen clearly that the $145,000 figure does not work, show her the arithmetic, and discuss realistic alternatives: a larger down payment, a lower purchase price, a co-borrower, or waiting until her documented income supports the loan. He should not shop for a lender that will accept the inflated figure.