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Qualifying Income: Does Yours Apply?

Income is one of the most important components of a mortgage application as it determines how the borrower is going to repay their loan. One of the most common questions we get asked is what kind of income is eligible to be used in the qualifying calculations. Your mortgage lender will want to first confirm your income source in writing and whether it is expected to continue. Let’s explore the different kinds of income sources that can be used as well as the documentation requirements for the different types of income;

Employees

Typically classified as a borrower who is earning an income paid by a third party company and income taxes are deducted by the employer. There are many types of this source of income that can be used in qualifying such as overtime, bonuses and shift differential. You will likely be expected to provide the following documents to confirm your income amount for qualifying;

Employees on SALARY WITH GUARANTEED HOURS (not using overtime or bonuses)

Most often you will be asked to provide a signed employment letter on company letterhead as well as a recent paystub that shows year to date income.

Employees who earn income from PIECEWORK, BONUS or OVERTIME

In addition to the above-required documentation, you will be asked to provide your most recent 2 years Notice of Assessments from Revenue Canada, T4’s and income tax returns to establish there is a consistent 2 year history of that additional income. The lender will also want the comfort of knowing you will continue to earn this additional income.

Employees on CONTRACT

If you work on contract with an employer and they deduct income taxes on your behalf, the document requirements are similar to an employee who earns overtime. The lender would require a copy of your contract as well as your most recent 2 years income tax documentation as detailed above to confirm your income history and amounts.

 Lenders look at it this way; if they can’t look forward, they will look back. In other words, if you can’t show your income is guaranteed, your lender will request a history of earnings in addition to some proof you are expecting to continue earning an income sufficient to qualify for the mortgage.

Self- Employed

This covers all the borrowers who are business-for-self or self-employed. These individuals own a business or are independent contractors who pay their own income taxes. Whether you are just 1 day self-employed or 20 years in business, there are financing options available with the various lenders who understand income confirmation can be a bit trickier for the self-employed.

Self-Employed for 2+ years

You will be asked to provide proof of self-employment as well as a 2-year income history to prove your “taxable” earnings.

Self-Employed for less than 2 years or minimal income declared

Good news is we have access to “stated income” programs that allow a borrower to state their income at a level that is reasonable for the industry they work in. Again, you will be asked for proof of self-employment, however, confirmation of other traditional income documents may not be required.

Other Eligible Income

There are many other types of eligible income sources that can be used for qualifying and without going into too much detail, below are some examples of the type of documents you will be asked to provide in order to confirm your qualifying income;

Part-time income: 1-2 year history of earnings required along with confirmation of employment.

Pension income: 2-year history of earnings via cheque slips and/or bank account statement showing pension deposit.

Disability income: must be long term and confirmed with documentation.

Child Support or Alimony: can be used if the divorce or separation agreement confirms the amount though some lenders will also want to see proof it has been deposited to your bank account for last 3-6 months too

Seasonal Employment:  minimum 2 year history of earnings required along with T4s and/or Notice of Assessments and employer confirmation.

Rental income: lease agreements and/or tax returns confirming amount of the rents from rental properties or legal suites.

There are many types of eligible income sources that can be used in qualifying that may not be mentioned above and the requirements vary between lenders and most importantly, exceptions apply to most of the documents requested above. There could be a document alternative, so be sure to talk to a trusted mortgage professional about the options available to you as we have access to lenders who have a “if you can prove it, we can use it” attitude. Do be aware these types of lenders may charge a higher rate or have a larger downpayment requirement.  Before signing on any dotted line, be sure you’ve talked through all the details of the mortgage you’re about to commit to for 1-10 years.

Contact The Mortgagegirl if you have any questions about your options at 780-433-8412 or email info@mortgagegirl.ca. Stay in the loop by following on Twitter @mortgagegirlca.

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