What Counts As Income For Your Mortgage?
April 1 2017 Posted by
When you submit an application for a mortgage, it’s the lender’s job to see that you are in a situation where you can cover the costs of the debt.
A large part of this process is determining how much income you have. It’s not the only part of what qualifies you for a mortgage, but obviously the more income you have, the bigger mortgage you’ll qualify for. Even if you don’t end up taking the entire mortgage amount that’s offered to you – in fact, it’s recommended that you don’t take it all in order to leave yourself some wiggle room for incidentals one you become a homeowner – it’s better to get approved for a mortgage larger than what you want or need then getting approved for a smaller mortgage and then having to scrape together the difference to buy the home that you want.
There are many types of income that can be used to qualify you for a mortgage but all income isn’t created equal. Although everything ends up as cash in your bank account, some types of income are stronger than others in terms of consistency and how easily it can be verified. Here are some of the most common types of income that you can use to qualify you for your mortgage, some of which may give you more buying power than you think.
Having income from a long-term, salaried position is the easiest way to qualify for a mortgage. Your income can be proved easily through an employment letter and recent pay stubs. Many lenders used to offer what’s known as “stated income” mortgages, where all a borrower had to do was state their income and the mortgage would be based on that number, without any verification process. Needless to say, those days are pretty much gone. Having a two-year employment history is ideal.
Self-employed income can be a little trickier to prove. If you are able to provide tax assessments of two years or more, then lenders view it much more favorably, but if you have a shorter history of self-employed income, then you’ll have to jump through more hoops to show how much money you’re making. Lenders not only want to see that you have the income, but that you will be able to service the debt that you’re accepting. You may have to go to an alternative lender, or purchase through a program specifically designed for self-employed borrowers and meet that criteria. You may also have to prepare yourself for having a larger-than-necessary down payment in order to avoid having to prove more income or to make up for the fact that you may not qualify for as large of a mortgage as you’d like. You also have to be careful with what you declare as stated income on your taxes. For example, if you underreport your income or claim too many expenses that could come back to bite you when you apply for your mortgage.
Similar to self-employment income, lenders don’t feel as comfortable using commission income to qualify you for a mortgage as they do with a started salary. Part of the reason is because commission can fluctuate wildly from year to year to year, season to season, or even month to month, and that makes it hard to assess as a stable source of income. Not all lenders use the same criteria to evaluate commission income, so your mortgage broker will want to explain to you which lenders embrace commission income and avoid the ones that will shy away from it. Know, too, that even with a two-year history of commissioned income, the lenders will look at that income as a range rather than a set amount and it may be averaged over the time period, even if the last year’s commissions were great than those of the previous year.
Bonuses, like commissions, can be used as a part of your total income, but you will need to show a history. Unlike commissions, for most people a bonus is out of their hands; whereas people can work harder to maintain or improve their commissions, bonuses are often left to the discretion of the employer. If they’re fairly consistent over a period of time, an average may be counted, but according to the residential mortgage underwriting practices and procedures laid out by OSFI, “income assessments should also reflect the stability of the borrower’s income, including possible negative outcomes (e.g., variability in the salary/wages of the borrower). Conversely, temporarily high incomes (e.g., overtime wages, irregular commissions and bonuses) should be suitably normalized or discounted.”
Tips are common in certain professions, and can make up a significant part of a worker’s income. That being said, many people don’t declare tips on their tax returns, and therefore, they don’t pay taxes on them. If this is you, it could become a problem when you want to get a mortgage and, similar to self-employed income, the income doesn’t match what you’re actually bringing in. You can’t have it both ways!
If you have a secondary rental suite that nets – or could net? – you income, then a percentage of that income is allowed to be added and considered when qualifying you for a mortgage. This is only the case if the property is owner-occupied, there is only one rental unit, and if the unit is legal and conforms to local municipal standards. The annual principal, interest, property tax and heat for the property including the secondary suite may or may not have to be used when calculating the debt service ratios. Once again, it’s most beneficial if you have two years of rental history with the suite, so the lenders can see how much income to add. If that isn’t available for whatever reason, you can get an appraisal to estimate the market rent for the unit.
What’s interesting to note is that CMHC will use 100 per cent of rental income to be added and considered then looking at your mortgage applications, but most lenders will not.
7.Child support and alimony
If you are receiving money from a divorce settlement in the way of child support and/or alimony, then it can count toward your income. If this is a new arrangement, however, it may not qualify; you will need proof that that the payments have been coming at the correct established amount at regular intervals before it will qualify. The length of history required varies depending on lender and circumstance. If you are paying child support and/or alimony, however, this amount will generally be deducted from your income and not count toward your income to qualify for a mortgage.
In both instances, the lender may require the legal separation agreement in addition to proof of payments.
If you’re receiving a pension and worry about getting a mortgage, don’t – or at least not because of your income source. Your pension income qualifies just as any other income since you’re receiving it on a regular basis.
Whether you have one or several types of the above income, don’t forget to include it when speaking to your mortgage broker. He/she will package your application in such a way to make it the most attractive to the best lender for your situation.
Are you looking to buy a property? If you like, I can tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much I could save you right now if you have an existing mortgage.
Until next time,
Your mortgage expert Evgeny Kamenskiy