Running a daycare and wanting to buy a new house ! Is it possible

[Julie]

Hi everyone, I have been dreaming of buying a bigger home for over a year now. But now that the time is getting closer to maybe thinking seriously about it I have come across some issues. Like running a daycare and the bank ??? The bank had told me last spring that I should NOT claim anything for my daycare take the hit and pay so it looks like I made more on paper. WHAT ?? They only look at the number after tax deductions, not what I actually made ?? Is this right ? Anyone out there who ran a daycare and got there forever home. Im in Ottawa if that helps on this question. :) I want to by so bad but wont get a good mortgage if it is all on my husband. We have other things to that we need to work on like our credit but 2 years hopefully all will be good. I just want to know if I will ever get my big house or will I have to go back to a paycheque job :( Help please ! Thanky you all in advance.

[5 Little Monkeys]

I've only briefly looked into this myself. I was told that they like to see a self employed person be in business for 3 years. The realtor I spoke too said that it's not impossible and there are other options as well. We have extremely good credit but I am self employed and my husband switched careers 2 years ago so that makes me nervous. However, we are mortgage free so selling our house and putting that money towards the new bigger one would be our saving grace.

I would suggest finding a realtor or talking to someone at your bank to get a better idea of what you will need to do though. I would also talk to your accountant and see what they say. They may have had other hdcp clients who went through the same thing. IMO, making a heck of a lot more one year than the others would look odd and could maybe warrant an audit? I really have no idea though!

[Rachael]

I have been dreaming of buying a bigger home for over a year now...I have come across some issues...The bank had told me last spring that I should NOT claim anything for my daycare...so it looks like I made more on paper...They only look at the number after tax deductions, not what I actually made ?? Is this right ?..

This is correct - but you are misunderstanding with regards to "what you have made".

Every single business has business expenses or operating costs. For us, that includes food, milk, supplies, increased utilities bills. So the day care fees that are placed in your hands are NEVER what you have made. They are your total business income. From these, as you know, we would normally claim for our business expenses and then we are taxed on what is left. It's that what is left figure, which is what we have actually made i.e. our profit.
If a child pays (for example sake) $10,000 a year in day care fees, that is not what you earned because from that, you have expenses. Suppose the cost of you caring for that child, providing food and supplies was $3,000, that means you actually earned $7,000.

I think you are viewing your total business income before tax deductible expenses as your income and that has never and will never be the case. That is like a grocery store considering their takings at the register as their business income without considering operating costs like staff, rent, building costs and supplier/inventory costs. Their total incoming funds is NEVER what that company makes in profit.

The advice the bank has given you therefore makes sense. By not claiming your business expenses, on paper, it appear that your total business income is entirely profit. Using the above figures again, on paper, you would have taken $10,000 and not claimed any expenses therefore it would be on paper, entirely profit meaning you earned and kept the full $10,000.

As you can see, this inflates your business income artificially.

$10,000 less $3,000 in expenses, means earning $7,000. Times that by say 5 children and you actually earned/profited $35,000 out of the $50,000 fees you received.

The bank wants you to not claim expenses (or keep them to a minimum) so on paper, you took $10,000 x 5 = $50,000 and all of it was profit so it appears like you actually earned/profited the full $50,000.

There is a formula banks use when calculating how much mortgage they are willing to give you. If they are able to say that your gross income is $50k rather than $35k, they can then justify lending you more.

I had to do exactly this myself when I bought my house 4 years ago.


However, we are mortgage free so selling our house and putting that money towards the new bigger one would be our saving grace.

That is similar to what my situation was.

I wasn't mortgage free and when my husband died, there was no insurance money to pay off the house. I had to get a mortgage in my own name for the amount outstanding on the loan. Thankfully, where we had lived in the house a couple of years and had put some money down, the house was worth a few grand more than the debt against it. Having this positive equity meant I was borrowing less than the house was worth, and therefore, the bank considered issue me a mortgage despite being self-employed as a fair risk on their part because if I had defaulted on the payment, they would have re-possessed and the asset was worth more than the mortgage. This all boiled down to, they would get their money back for sure.

[playfelt]

They may also ask for up to three years worth of taxes so taking the hit for one year won't make a total difference. They use the amount on line 150 for what your income is. If you go through a mortgage broker you will have a better chance of getting a loan. We just negotiated for our daughter this summer through a broker as she is self employed. The banks are much stickier about proving income and having a long track record.

Also on the buying a larger house think about what the payments will be and if you can afford it still if your daycare is not full as our numbers can fluctuate. Also if you have young children of your own - ie under age 6 consider how Bill 10 y effect the number of spaces in your daycare.

[cfred]

I just bought my house 2 years ago, without another source of income in the family. I'm it and the daycare is what funds us completely. Honestly, I didn't think I'd get a mortgage at all, for the same reasons you're concerned about. But I did and we're fine and it was well worth exploring...just to see what I could get. I did have $100K to put down (divorce settlement) but still carry $200K. I was astounded when my broker called saying we had financing....like really, completely shocked! Sooo happy I bothered to take a chance because my expenses are now substantially less than they were when I was renting.

Go ask a good broker. It never hurts to ask :)

[superfun]

I agree with everyone else. They all have really good advice. One thing I want to add, if one person says no, find somewhere better. If everything else is good, and the thing holding you back is being self employed, you'll be able to get a mortgage.
I've been doing daycare for about 18 months, and between personal mortgages, rentals and refinances, I've applied and qualified for 4 mortgages. My friend has been doing her daycare for one month longer than I have, and she just went to the bank she always deals with. They told her they couldn't use her income at all. I told her to check somewhere else, but she thinks they're right and she'll get the same answer everywhere.

[33 Daiseys]

you have to have been in business for 5 plus years, making over 40,000 a year, and have to bring in proof via your income tax returns. I just applied for a 300,000 mortgage at scotiabank, and was approved. My husband makes 65,000 if that helps to compair.

[superfun]

I'm glad not every bank has those rules. Home daycare providers around here would never get a mortgage. I don't think there are many, if any, that could be making that much.

[mickyc]

We had our house for sale in the spring. We had our mortgage broker come to our home and she did mention that with my daycare not making much money on the bottom line that she would have to be a bit more creative. We were pre-approved for approx. $350,000 based on my husbands wage (he makes approx. $60,000 a year), my wage and what our current bills were and according to what our asking price was for our current home. We ended up not selling and are going to stay put but don't worry, it can be done. Get a broker and they will contact all the banks and someone should say yes.

[Rachael]

Actually, Mickyc raises a very relevant point. It's not just your earnings which matter. It's your debt load.

Someone who earns $100k but has credit card bills, car repayments, retail debt, loans, line of credit, might not be able to get a mortgage for as much as someone earning $50k who has no debt.

[Julie]

Wow thank you. You mad this so much clearer for me I get in now. Very much appreciate the advice and help.