One of the most important pieces of information that you need to confirm in order to qualify for a mortgage is satisfying the lenders requirements with respect to your income. Your income level is one of the single most important determining factors in how much of a mortgage you can qualify for and therefore, lenders ask for detailed confirmation during the mortgage approval process. Obviously the more money that you make, the larger of a mortgage you qualify for. Typically there are four main ways that people are paid and they are; salaried employees, hourly employees, commissioned employees and the self employed. All four have their own unique requirements for the documentation you need to provide in order to satisfy the lender’s conditions. I’ll explain the different documentation that you will be asked to provide in all four situations.
SALARIED EMPLOYEES: being a salaried employee means that you have the easiest path to confirming your income for your mortgage approval. The most common and accepted documentation would be to provide a current salary letter from your employer, stating your position, start date and salary and must be signed by the HR representative that the lender can call to verify the details of the letter. It is still quite common that lenders will call employers to verify the information on the letter is indeed true. The other piece of information that is needed is to provide a current, dated paystub so that the lender has two pieces of information in order to satisfy their conditions. Lenders like to see paystubs that are electronic and preferably from a payroll company like ADP. If your company is small and the paystubs are not done through a payroll company, be prepared to provide extra documentation to satisfy the lender such as bank statements to match the pay being deposited into your account or even t4s or personal Notice of Assessments from revenue Canada to match the income. Typically lenders want to confirm that you have at least a two year employment history and if you have been at your current employer for less than two years, they may ask for an old t4 from your previous employer to confirm.
If you are in a salaried position but receive bonuses annually or work overtime, lenders can use your total income to help you qualify for a loan. The only consideration is that a bonus is just that, it isn’t guaranteed and can differ from year to year so using bonus income in order to qualify for a larger loan is typically not advisable.
HOURLY EMPLOYEES: If you are paid based on an hourly wage, mortgage lenders will want you to provide confirmation of the amount you are paid per hour and also how many hours you are guaranteed a week. A letter from your employer should state the # of hours that you are guaranteed a week, the position, start date and the hourly wage that you are paid. Typically lenders will want to confirm that you are guaranteed full time hours (35 hours plus) as part time income is viewed slightly different from full time employment. With a full time hourly job you will also be required to provide a current paystub to confirm the employment letter details and in some cases the lender will ask you to see your most recent or last two recent years t4s. If your hours seem to be consistent and the lender is comfortable with the hours/pay remaining the same, they will usually accept an employment letter and paystub to satisfy the income conditions. On the other hand, If the hours to vary from week to week, the lender may end up taking an average of your last two years of income in order to qualify the loan. If your income is part time (less than 35 hours or no set hours from week to week), in almost all cases the lender will want to see a two year average of your income in order to confirm the employment history. This means you will need to provide two years of t4s, a current employment letter and paystubs to satisfy the lender’s requirements.
COMMISSIONED EMPLOYEES- being a commissioned employee means that you are paid on a commission basis solely or in combination of a base salary and commissioned component. The most common types of commission roles will be in the sales field and in order for lenders to have a comfort level for using the income you earn, they need to see that you have a history earning that type of income. That is why most lenders will ask a commissioned employee to provide their last two years or T4s or personal Notice of Assessments and from that the lender will take a two year average to use for qualifying the loan. The lender will be looking to make sure that there is not a large variation in the income from year to year and that the income range is consistent. In fact some lenders will only use the lesser of the two years income in qualifying. That means instead of using a two year average should you make $50K in one year but $100K in another, they will only use $50K to qualify your income. On top of providing two years of T4s or notice of assessments, commissioned employees should also provide a current paystub and current employment letter stating their position, length of employment and their pay structure (100% commission or base plus commission, etc.).
SELF EMPLOYED- being self employed obviously has several tax benefits, but when it comes to qualifying for a mortgage (or any kind of credit for that matter) being self employed can be the most difficult incomes to verify. There are two ways to look at self employed income. Typically to qualify under a traditional mortgage with a financial institution and qualify for all of the best rates and terms, the lender will look at a borrower’s net income. The net income is the amount of income that you pay tax on after all of your write offs. On your notice of assessment and/or T1 General, the lender will look at the “line 150”, which is the NET income that you report every year. A lot of borrowers are confused between the “gross” and “net” income they report and what they can use to qualify. For businesses where there are a lot of write offs against the income or in a business where a lot of the business is paid in cash, the net income can be much lower than the income that you actually take home. Lenders will typically allow a self employed borrower to either gross up their NET income by 15% (take their two year average income and add 15%) or use add-backs from the gross income. The add-backs that are allowable to be added back to your net income (and therefore increasing the income they use to qualify the loan) are: motor vehicle expense, business use of home, meals and entertainment and your capital cost allowance. Being self employed means that you will be asked to provide more documentation than any other income type. The usual documentation that you should be expected to provide are: your two most recent personal notice of assessments from Revenue Canada (called NOAs) and one of the following: your two most recent personal tax returns (T1 generals) and including the Statement of business activities (which will show your deduction from your gross income) OR your articles of incorporation showing ownership in a company OR a business licence. Lenders are looking to confirm that you have been self employed for at least two years so they are looking for any of these documents to verify that you have been self employed that long.
The other option when you are self employed is to qualify under one of the lender’s self employed stated income programs, where the lender qualifies you based on various different factors other than what your net income is. These typically cost more with respect to interest rates, insurance premiums, etc. They also have several more restrictions than a regular qualified loan. I won’t go into great detail explaining these programs in this article but can explain them at any potential client’s request.
The above-mentioned guidelines for confirming your income are in general terms and there are obviously exceptions to the rules. Lenders are willing to look at contributing factors when making decisions on a client’s worthiness as a borrower and will make their decisions when factoring the client’s overall financial picture. The higher the downpayment and better the credit, the less documentation the lender will require. By ensuring you understand what documents are going to be required before you start the process, you will know exactly what to expect and can being the process of collecting the information that you need. By providing your income documentation up front, it leaves the chances of there being any surprises coming up at all in the process.