Your income and your Home Mortgage qualification

Two factors affect your income qualification:

• The amount of income you earn and the type of income you are receiving.
• The amount of your income and your Debt Service Ratio.

A Debt Service Ratio is a guide that lenders use to get a preliminary assessment of whether a potential borrower is already in too much debt. This ratio shows the proportion of gross income that is already spent on housing-related and other similar payments. In general, a debt-service ratio of less than 40% means that the potential borrower has an acceptable level of debt.

Government of Canada regulations state that you can only use 40% of your pre-tax income (gross annual income) towards your mortgage and debt obligations including heat and property taxes. The type of income regulates the amount of the down payment required and the maximum amount allowable to refinance your mortgage. Someone on a regular salary or hourly job that has been at the position for 3 years or more, can purchase a home with as little as 5% down and refinance their mortgage up to 90% of the value of their property. Someone who is self-employed or earns sales commissions, can purchase with as little as 10% down and refinance their mortgage up to 85% of the value of their property.

Income required to qualify for a Home Mortgage

In most cases only 40% of your gross annual income can be used towards your mortgage and debts. In some instances, when your Beacon Score is above 680, you can push that number up to 44%.

A Beacon Score is the first factor most lenders consider when assessing a borrower. It’s a number that summarizes your credit situation and shows lenders what kind of risk you’re likely to be as a borrower. (The name “Beacon” is issued by Equifax, the largest credit-reporting agency in Canada). Credit scores can range from 300 to 900. A score of 620 is considered low, 700 average and 750 high. Individual scores can change monthly.

While no one knows the exact formula, Beacon Scores are generally based on:

• Previous payment history (about 35% of score)
• Current level of debt (about 30% of score)
• Length of credit history (about 15% of score)
• Number/frequency of new credit inquiries (about 10% of score)
• Types of credit you have (about 10% of score)

A high credit score normally qualifies borrowers for the best possible rates and terms.

All this is factored in as part of your Total Debt Service Ratio (TDS). Your TDS includes payments for your mortgage, property taxes, heating, credit cards, student loans, lines of credit, car loans and any other personal loans or debts you may have. You must pay at least 5% down for your mortgage and your closing costs (roughly 2% for first-time home buyers and 3.5% for repeat home buyers). In the event that you are obtaining a cash-back mortgage product, you will be required to pay the closing costs from your own sources.

Income Verification

All income will be verified by the mortgage broker and again by the lender. If you are self-employed you must provide your last two years’ Notice of Assessments (NOA’s) in order to verify your income. If you are less than 3 years in active business, you may state your income. If you are 3 years or more in active business, the average of your last two years’ NOA’s will be assessed using line 150. If you are on a regular salary or are paid hourly, the broker will request your last two years’ T4 slips to verify your income.

Some other documents that the broker or lender may ask for are:

• Income Tax Returns (T1 General Tax Form)
• T4, T4A or Commission Earnings Tax Form.
• Notice of Assessment
• Recent Pay Stubs
• Financial Statements from your Banking Institution
• Letter of Employment (Proof of employment document must be on official company letterhead, dated and signed by appropriate authority with full contact information to verify its authenticity. It must contain length of employment, date of hire and position. It must state that you are a permanent full-time employee and not on probation. If there are bonuses involved, it must state so. If you’re paid hourly, it must specify hourly rate and number of guaranteed hours per week.

Types of Eligible and Ineligible income for your Mortgage

Eligible Income

• Permanent Full-Time Employment. Required to be off probation and have 3 years’ continuous job history.
• Permanent Part-Time Employment. Requires 2 years at the same job and 3 years’ continuous job history.
• Secondary Employment. Must be finished probationary period.
• Overtime, commissions, bonuses, profit sharing.
• Investment Income. 100% of investment income can be used towards your home mortgage payments.
• Pension income. Can be used towards your mortgage payments.
• Rental Income. Can be used, but the guidelines vary with different mortgage lenders.
  (Some will use 50% and others will use 80% as income).
• Maternity Leave Payments (pregnancy leave).
  Requires confirmation letter from employer indicating position at the company, the return date and your salary
  upon your return to full time work.
• Child Support and Alimony Payments. Must provide court-order papers.
• Disability Income. Must be a permanent disability, otherwise you must provide letter from
  employer stating eligibility date of returning to work.

Ineligible Income

• Social Assistance or Welfare
• Predicted income or predicted bonuses (unless you are receiving money from a documented income product only).
• Income from illegal sources (such as a non-licensed basement apartment. Some exceptions can be made). Speak with an experienced professional mortgage broker today to see if your income qualifies.