Income is one of the most important components of a mortgage application as it determines how the borrower is going to repay their loan. The higher your income, the higher mortgage amount you can qualify for. One of the most common questions we get asked is what kind of income is eligible to be included in the qualifying calculations by the different lenders. My quick answer is to forward me confirmation of this income in writing and to verify whether this income is expected to continue at these levels, then I can advise if a lender will consider it towards qualifying.
Let’s explore the different kinds of income sources that can be used as well as the documentation requirements for each of the different types;
Typically classified as a borrower who is earning an income paid by a third party company and income taxes are deducted directly 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 asked 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, and/or T4’s, and/or full personal 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.
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 highest eligible 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. Sometimes a signed Statutory Declaration done up by the lawyer may be acceptable if a formal agreement is not available
- 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. 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 other types of lenders who will be more flexible though 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 all your mortgage needs, contact Jackie at 780-433-8412 or email@example.com. Stay in the loop by following on Twitter @mortgagegirlca.