Wednesday, 13 January 2016

Income Confirmation: 101

While I'm no king of analogies, I'd like to think that applying for a mortgage is a bit like being a lion in the circus. Not because of the abundance of clowns ;), but because you're a majestic beast being forced to jump through many hoops by the lion-tamer(the lender) so that you can have a tasty treat at the end(your mortgage). While the number of hoops and the height may vary, the one which is almost universal for all mortgage applications is known as:

Income Verification

Income qualification is the process by which your Mortgage Broker, and in turn your lender, attempt to verify both the amount and the long-term sustainability of your income. If you do not have enough income to make your payments in a timely fashion, it becomes quite a bit more difficult to get a mortgage approval(*note I said 'more difficult', not to be confused with impossible!). Due to constantly increasing instances of fraud and misrepresentation, it can be more difficult now than ever to verify and confirm your income.

Fraud

2015 played host to some well-publicized mortgage fraud, thanks to a few bad eggs ruining it for the rest of us who work hard and remain ethical and honest in our businesses. As a result, the qualification and verification processes to obtain a mortgage have become more stringent and demanding. It is more important now than ever before to make sure you have a Mortgage Broker on your side who can help you navigate the process and explain the steps along the way.

Together, we will go through both your current earnings as well as your historical income to determine the best documentation to verify how much you are paid. This depends on factors such as your length of employment, how you are paid(hourly, salary, commission, etc.), or whether you are self-employed.

Employees

When you are an employee, it becomes somewhat easier to verify your income since you are being paid by a third-party source. Depending on your income type(salary, hourly, commission, tips, etc.) you may need only some or all of the following documents:
  • Letter of employment from your employer
  • Recent paystubs
  • Your latest 2 years Notice of Assessment(CRA tax document)
By using all or a combination of these documents, we can verify your length and place of employment, your average earnings, and whether or not you are likely to continue earning this amount. Having an average of your past years income(NOAs) helps to establish your average earning potential, regardless of how your pay is calculated. It also helps to show a track record and whether your income is increasing or decreasing.

Self-Employed

Those who are self-employed often find themselves under more scrutiny when verifying income, and the reason is quite simple: If you  own the business, you are the one in charge of writing your own paycheque. In light of this, lenders want to confirm not only your income but also the income of the company. No matter the business you're in, you must be able to show that your earnings are reasonable in relation to the company's earnings. Income for those who are self-employed can be established by some or all of the following:
  •  Your latest 2 years T1 General tax returns(CRA tax documents)
  • Your latest 2 years financial statements for your company
As always there can be exceptions to these rules and some lenders may ask for more or less documentation than others. Another important point is to consider the risk of your application overall. What is your 'loan-to-value', or the percentage of mortgage vs. the property value. If this is more than 80%, you can bet lenders will want to verify your income beyond any doubt. Also take into account your credit score, have you been late or missed any payments? Do you or have you had any accounts in collections? All these things can contribute to a 'riskier' mortgage application and may signal the lender to do more due diligence with your particular application.

If you'd like to know more about how to verify your income, or how much income you might need to qualify for your dream mortgage then give me a call any time! I can be found online at www.ryanWsmith.ca or 'Like' my Facebook Business Page to keep up-to-date.

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