Mortgage Applications: How Lenders Review and Calculate Your Income

Navigating the complex world of mortgage applications can be an intimidating journey for anyone. Whether you are a first-time homebuyer, renewing your mortgage, or exploring options for investments or refinancing, understanding how lenders assess and calculate your income is pivotal. As a Mortgage Broker with access to a diverse range of lenders, each with its unique guidelines and criteria, I can leverage this knowledge to provide you with the best mortgage products and solutions tailored to your specific financial situation.

When applying for a mortgage, one of the key factors lenders examine closely is your income. Your income serves as a crucial indicator of your ability to repay the loan. In this blog, we’ll dive into the common types of income that lenders typically consider:

1. Standard Income from an Employer:

For employees, lenders usually require your most recent pay stub and a Letter of Employment. These documents serve to validate your employment status, including your position, your employer’s name and contact information, your start date, and your hourly or salary wage. Lenders will allow your base wage for qualification provided you are not on probation. If you are an hourly employee, we will need to verify whether you are working full time or part time. Part time employment is acceptable, but only your minimum hours worked per week can be used otherwise a two year average is required. It is important to ensure that your pay stub shows that you are working either full time hours or the minimum hours as per your letter of employment if you are part time.

2. Variable Income:

This category encompasses bonuses, overtime, commissions, seasonal work, contract jobs, and other forms of income that lack guaranteed hours or salaries. To qualify for a mortgage using variable income, you typically need to demonstrate a minimum 2-year history of such earnings. For instance, if you are a nurse who consistently works overtime, the lender would rely on a 2-year average based on your most recent tax slips (T4s).

While it might seem frustrating, especially when a significant portion of your income is variable, lenders prioritize income consistency over multiple years to mitigate risk. A year-over-year increase in your variable income is preferable as it indicates reliability, whereas a declining trend could raise concerns for lenders.

3. Self-Employed Income:

Proving income can be more intricate for self-employed individuals, and the requirements vary based on your business structure.

Sole Proprietor: Lenders typically request the most recent two years of your T1 General and the T2125, also known as the Statement of Business Activities. These documents provide a comprehensive overview of your business’s financial health and income. Lenders focus on your net income after expenses and may consider a 2-year average of this figure. In some cases, we can inflate your income by 15% to enhance your mortgage eligibility. Many self-employed individuals aim to minimize their taxable income, which can create challenges in qualifying for a mortgage. We can always explore solutions like the Stated Income Program, which allows the use of a reasonable income figure between your gross and net income.

Incorporated Business: The rules are similar to sole proprietors, but the documentation requirements differ slightly. You’ll need to provide T1 Generals, indicating whether you pay yourself through T4 or Dividends, and Business Financials prepared by a professional accountant. Business financials reveal essential information about your sales, expenses, payroll, and retained earnings, offering insight into your business’s performance over the last two years. Typically, lenders prefer a two-year increasing average, unless you explore alternative lending solutions or the stated income program. Some lenders have Business for Self programs where we can add back some business income to your file to assist with qualification. 

When self-employed, it is important that your documentation is as up to date as possible and readily available. Additional documents such as one year business bank statements and your incorporation certificate may also be required.

In Closing

The process of assessing and calculating income for mortgage applications can be complex and can vary depending on your employment type. As a Mortgage Broker, my expertise lies in understanding these nuances and helping you navigate the complexities of the mortgage application process.

It’s essential to be prepared to provide a wide range of documents, as lenders have the right to request additional information before granting a mortgage. The mortgage application is a thorough process, as lenders want to review everything meticulously before granting a mortgage. By working closely with my team and I, you can increase your chances of securing the mortgage that best suits your needs.