Income Verification & Qualifying

There are a few key components that play a role in mortgage approvals: income, verification documents, level of down payment, and credit score.

One of the most important items in the initial assessment of someone’s application, is the level of income that is available for each person that will be on the mortgage. There are 2 parts to this important first step: how much declared or undeclared income there is, and what are the documents available to verify the sources of income. The result of this will determine if a file is going to be viewed as “income qualifying” or “stated income.” If you are under the “stated income” category, the following components will be impacted: required down payment amount, available rates, and the potential for lender and/or broker fees.

A file that is “income qualifying” means that the income in the application is sufficient to meet the lender’s debt service ratios, and that there is sufficient/acceptable documentation to verify the income. Appropriate documentation will depend on how you earn your living. If you are a regular employee and your employer takes deductions from your paycheque, a signed employment letter with an accompanying paystub is required.  The employment letter needs to confirm your original hire date, position, and wages. If you are paid hourly, the letter should comment if you receive guaranteed hours or if your hours vary. Lenders will do a verbal confirmation of the employment letter as part of their compliance rules. If you are self-employed, or if your income varies due to varying work hours, seasonal employment, commissions, or have multiple sources of work, you will have to provide your tax returns for the last 2 years (all pages of the T1 General) with the accompanying Notice of Assessment & company financial statements. Other documents that may be requested include: T4 slips, T5 slips, and any other official document that is used to declare your income to CRA.

If there is not sufficient declared income, or if there is a lack of available paperwork to verify the income, the file will be viewed as “stated income.”

The above applies whether you are purchasing your primary residence, 2nd home, rental property, or refinancing a property that you already own.

Your credit score is also an important consideration that will influence your financing options.

You must have a minimum of 2 “major” trade lines reporting on your credit report for a minimum of 12 to 24 months depending on your level of down payment and which lender and/or insurer the application is going through (cell phone accounts are usually not recognized as a trade line).  Your credit cards should be used to no more than 75% of their limits. Joint credit cards are fine if you are partnered, but you should make sure that you each have at least 2 credit cards in your own names. If the lender and/or insurer feels that your credit report has not been established long enough, they will ask you for alternate sources of credit verification such as a letter from your landlord to confirm rent payments made on time, payment of utility bill accounts, and/or 6 to 12 months worth of bank statements to confirm no NSF cheques. Minimum credit score requirements for some lenders can range from 600 to 650. Ideally, you should aim to have your credit score 680 or higher.

Debt Service Ratios

For credit scores that are 680 or higher:  

Gross Debt Service Ratio (GDS) = the mortgage payment + property taxes + strata fees + heat = maximum 39% of your income.

Total Debt Service Ratio (TDS) = all of the new payments associated with the new home purchase + any other liabilities you have (car lease, credit card, etc) = 44% maximum of your income.

If your credit score is less than 680, these ratios may be reduced to 35% and 42% depending on the lender and mortgage insurer.

Stated Income Financing Options

For purchases, there are 2 ways you can go for stated income: either based on a large down payment, ie 20-50%, OR as an insured mortgage up to 90% financing with Sagen or Canada Guaranty.

With a minimum of 20-50% down, there are several lender options available. The down payment requirement is influenced by many factors: property location, property type, credit score, intended use, ie primary residence or rental, sources of income, and overall application strength.

For high ratio financing (up to 90%), both Canada Guaranty & Sagen have a minimum 10% down payment requirement. At least 5% must be from your own resources, the other 5% can be from a family gift from an immediate family member. Mortgage insurance premiums will apply.

Credit: As above, however they want you to each have a minimum of 2 major trade lines for a minimum of 2 years. A minimum credit score of 650 is recommended.

Sagen calls their stated income program “Alt-A” and Canada Guaranty calls their stated income program “Low Doc Advantage.”

Of the 2 insurers, Canada Guaranty may offer a little more flexibility in their underwriting. Sagen has previously indicated that their program is really for businesses that have a high “cash” component like hairdressers or car mechanics.

Assuming the insurer finds your stated income acceptable (passes their reasonability test), the above mentioned debt service ratios will still apply; GDS maximum 39% and TDS maximum 44%. If your credit score is less than 680, the 35% & 42% may apply. It will depend on the overall application.

If you find yourself in a position where you are changing from a sole proprietor to a corporation, transitionary situations are OK, as long as: you can prove the business has been operating for a minimum of 2 years, that the business has not changed, and that the stated income can be supported with business revenue/financial statements, etc. They are looking for continuity of business, growth of income, and consistent business operations.

The information provided in this post is a summary based on information available today. The information is subject to change without notice.

Feel free to contact me with any questions about qualifying, or if you would like an assessment of your eligibility for mortgage financing.