Banks and other lending institutions look at three main factors to determine whether an applicant qualifies for a mortgage and how large that mortgage can be. The three key elements are income, credit history, and down payment.
1. INCOME:
Various types of income are acceptable to lenders and mortgage insurers. Here are examples of acceptable income sources:
Salary:
If you are salaried the lender will ask to see an employment letter confirming job tenure, position, and salary, as well as a recent pay stub. Lenders look for employment stability and usually require one to two years at the same job. If you recently moved to a new job in the same field, they will want to ensure that you have fulfilled any probation requirements. Career oriented education, or training, for a specific type of work is considered job experience but you must still be past probation.
Hourly:
When you are hourly paid, lenders will multiply the number of 'guaranteed hours' by your hourly rate to determine income. Additional earnings from overtime, shift premiums, bonuses, travel allowances, vacation pay, etc. can also be included. In this case, they will use an average of your total earnings over the previous two years to determine qualifying income.
Part-time, Contract, Seasonal:
With these types of employment lenders will use a two year average to determine income. If earnings for the most recent year are lower than the previous year, they will use the most recent year's income. Employment insurance (EI) can be included in this equation for those who are out of work for a period of time each year due to seasonality.
Pension (company, CPP, OAS, disability):
These are all acceptable sources of income. Short-term disability income is not acceptable but CPP is, because it is considered permanent. In some cases, ODSP is allowable if it can be shown to be long term. Income from pensions that are not subject to tax can be grossed up (increased - usually by 15%) for qualifying purposes.
Investment Income:
Again, if the investment income can be shown to be regular and long term it will be considered. An example would be annuity income from a RIF.
Child Tax Credit & UCCB:
Not all lenders acknowledge this type of income. Those that do will want to ensure that these benefits will be received for the entire term of the mortgage. Some will allow the Child Tax Credit to be grossed up (increased) because it is non-taxable.
Business For Self:
Individuals who have owned a registered business for at least two years fall into this category. Lenders and mortgage insurers use a two year average (from line 150) on a person's tax returns to determine qualifying income. If the most recent year's income is lower, that number will be used.
If the business owner has a very high credit score, they may be allowed to simply 'state' their income as long as the amount stated is reasonable for that type of business. The mortgage insurance (CMHC) premium for 'stated income' mortgages is higher.
Commission:
Commission, and salary plus commission, is treated in the same manner as other variable income sources - using a two year average. In some cases the amount can be 'stated' if the person has excellent credit and the amount is reasonable for the job type. Again, the insurance premium is higher for stated income.
2. CREDIT HISTORY:
Good credit has become increasingly important in light of recent problems in financial and mortgage markets worldwide. Lenders look at credit scores and details obtained from two credit agencies in Canada (Equifax and TransUnion) to determine mortgage eligibility. Scores range from 350 to 850 and the higher the better. You will need a minimum credit score of 600 and one to two years of credit history showing on your credit bureau. Applicants with scores above 650 may be eligible for 'cash back' and 'borrowed down payment' mortgages.
If you don't know your credit score, have damaged credit, or don't have any credit, you should contact a qualified mortgage professional for assistance.
3. DOWN PAYMENT:
Banks and other lending institutions prefer that borrowers put some of their own hard earned savings toward their purchase in the form of a down payment. Generally speaking, the larger the down payment the easier it is to obtain mortgage approval.
The government recently eliminated 100% financing as an option for Canadian homebuyers. The minimum down payment is now 5% of the purchase price of the home. The down payment can come from the applicant's savings or investments, or can be given to them (gifted) by an immediate family member.
Alternatives still exist for qualified buyers who haven't been able to save the minimum 5% down payment. For more information on these alternatives look under Down Payment Options or contact anyone on our Mortgage Professionals Team.
