Your Income is the Outcome

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Income, income, INCOME. Whether you’re buying or refinancing, personal income is a KEY factor in qualifying for a residential mortgage in Canada today.

And it’s not just how much money you earn: it’s the form in which you earn it, how long you’ve earned it that way, and how easy it is for a lender to verify. The more of those boxes you tick, the better the rate and terms you get – whether it seems fair or not.

With many clients nowadays, I am a messenger wearing a Kevlar vest.

I have to tell them that traditional mortgage lenders won’t care if:

you’re getting a promotion this Fall.
you sold your Bitcoin at the very top.
your Biggest Commission Cheque Ever is coming at month-end.
your new business is growing in leaps and bounds.
you’re writing off expenses like crazy, because tax (obviously).
your net worth is virtually as big as this new mortgage will be.

What traditional mortgage lenders DO like is the ability to go back two or more years and reliably track the same style of income, and be able to verify it through second and third parties. These policies create a “pecking order” of income types. Here are a few.

Arguably at the top of the income food chain is the (long-term) salaried employee. A lender is in a happy place whenever they can phone an HR person at an arms-length employer who wrote you a job letter; review your recent pay stub, which shows the same semi-monthly numbers like clockwork; and reconcile your pay with a year-end T4 slip – a copy of which has been submitted by your employer to Revenue Canada. With that T4 as an additional check, the lender figures if you’re lying to them, you’d be lying to the CRA as well. That’s why some mortgage lenders are so comfortable with this form of income, they may actually accept the wage of a person just out of (or still in!) a probation period.

Pensioners are gold, too. Whether that income’s from an employer’s plan or even better a government indexed pension like OAS or CPP, lenders can virtually set their watches to it – and it’s easily verifiable through the disbursing pension fund (and their T-slips) or the Canadian government itself.

Next in line is the variable-income crowd. These are the hourly workers, the part-timers, the bonus/commission earners with a base salary. There can be up and down years; but as long as the global amounts earned from the same employer(s) have been reported and tax-filed/deducted for two years, lenders will look at the two-year average or a similar calculation. If this is you, look at “Line 150” of your last two annual Notices of Assessment: that, in the eyes of lenders, is your ballpark employment income.

Further along is the 100% commissioned salesperson. As long as you’ve been selling the same product/service for two tax years or more (and have the annual T4A slips to show for it), some traditional lenders will consider your sales prowess. But take note of a few things: I said some, not most, traditional lenders. And slump or streak – if there are big differences between the past two tax years, those lenders may be more skeptical and conservative when it comes to your borrowing power. Most importantly, recognize that they will ONLY take into account what you’ve earned and filed/paid taxes on in the PAST, not how your sales are looking so far this year, or for next month.

We then wander into the world of the self-employed. Say your business is incorporated and you pay yourself dividends and/or a salary. So long as that business and income stream is at least two (tax) years old or more and it’s reported and tax-paid, it can be considered. Same goes for a sole proprietor who has reported gross income from business activities, then a net income after deductible expenses. This is all best verified by accountant-prepared, corporate and/or personal tax returns; but big-picture it’s still your word, not an employer’s. Less verifiable.

One potential pitfall for self-employed borrowers is how long you’ve been in business for yourself. If you’ve been on your own for less than two years, traditional mortgage lenders will NOT consider you (exceptions may be considered if you happen to have been employed in the same industry for several years beforehand).

But the BIG problem arises for the self-employed borrower if their personal NET income is too low, because net income is what traditional lenders will use to qualify you, subject to some minor allowable tweaks. So whether you kept your earnings in your company and paid yourself a very modest dividend, or your sole proprietorship expensed net income to oblivion, you may be walking out of your bank feeling unpleasantly surprised. Imagine my business-owner client’s frustration when he realized his salaried manager qualified for a bigger traditional mortgage than HIM!

To the dismay of the self-employed borrower, Canadian tax planning and mortgage planning are diametrically opposed. As a colleague of mine once said on the matter: “Which do you want? Low income taxes? Or a low mortgage rate?” More than ever given the recent mortgage rule changes, self-employed borrowers can’t have both. I’ll talk about that more another time.

There’s a smorgasbord of other income types that lenders may consider: disability, spousal/child support, certain investment income, seasonal/EI and more. And of course there’s the rental income from your basement suite or a stand-alone investment property; but that’s also for another day.

You’ll probably get a hard NO from everyone if your “income” comes from ineligible sources such as capital gains, shareholder loans (to be) repaid by your company, retained earnings in your company, or winnings from gambling. Income has to be sustainable, reliable and verifiable. Did you tell the CRA about all those cash tips you earned as a server? If not, you can’t take credit for them as income. At least with a traditional lender…

Finally, for the borrower showing little to NO qualifying income, there are also solutions – from the non-traditional sector.

For a rapidly growing portion of the Canadian population – and my clientele – what people actually earn, and what traditional mortgage lenders will recognize as qualifying income, are two increasingly different numbers. Luckily in response, a number of legitimate alternative and private mortgage lenders have entered the fray to service this chunk of the market.

Many are actually divisions of Canadian chartered banks and other brand-name mortgage lenders, as well as specific products offered by local credit unions. Their qualification policies connect the dots between reported income and real income, while also offering greater flexibility on credit and other criteria…including the recently self-employed.

And while they command higher rates and lending fees to compensate for that flexibility, alternative mortgage lenders are becoming an easier and easier reality for me to explain. In fact, I have relied on alternative lenders myself.

There are only a couple or so lines on your entire tax return that traditional mortgage lenders care about. Alternative mortgage lenders can read between them.

Stay tuned for a tour through Canada’s current mortgage lending ecosystem – traditional and beyond.

In the meantime, find me online to start a discussion about your or your client’s unique mortgage needs.

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Toma Sojonky - Mortgage Advisor

Mortgage Brokers Association of BC
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