When you apply for a mortgage, income will be a primary factor in whether you qualify or not. What types of income are acceptable for qualifying for a mortgage? Which alternative sources of income are acceptable for mortgage approval?
There are many home financing options available, but some will not be accepted by your Leduc mortgage broker. This mortgage guide will discuss acceptable financing options. It will help you focus on the types of income that are most likely to lead to mortgage approval.
Which Income Is Acceptable for Mortgages?
Money is money, right?
When you apply for a mortgage, the lender wants to make sure that a couple of things are taking place. First, it wants to ensure that you are financially stable and can handle the monthly payments of a housing loan. Second, a mortgage broker wants to make sure that it is actually your income that is being used.
While the booming Canada property market has been very beneficial for many, it has attracted some investors who might be guilty of drug money laundering. That is why some of the income stipulations are so complicated. The Canadian government doesn’t want to have people act as intermediaries for drug money laundering.
Therefore, financial institutions want you to be able to verify that the income actually belongs to you.
In this short video, Edmonton mortgage broker Dennis Ward of Advantage Mortgage breaks down the alternative sources of income you could utilize when applying for a mortgage in Alberta.
Total Qualification Budget
Applying for a mortgage can feel like such a chore because your entire life is under a microscope. Leduc lenders will try to gauge how much money you are spending on various expenses – such as groceries, utilities and rent – in your budget. They will try to determine if you have enough money left over to pay for your new home in Leduc.
What does your Total Qualification Budget consist of?
Alberta mortgage brokers will use your income to calculate your “Total Qualification Budget.” Lenders will estimate what percentage of your income can be dedicated to repaying your mortgage. This might be referred to as your “Total Qualification Budget.”
Generally, this will consist of stable, permanent, unencumbered income from your primary job. But, some people work second or third jobs, right? They also receive other types of financial benefits. These are considered to be alternative sources of income.
Each lender will differ concerning which alternative sources of income are accepted. Banks are the most stringent. They might prefer not to loan to those with alternative income sources. Private lenders are more flexible and willing to loan to those rejected by a bank.
In general, the ideal for your lending institution is for you to have permanent, stable income. This “rule of thumb” will be applied both to your primary source of income and alternative income sources. What does “permanent and stable” mean with respect to qualifying income for mortgages?
The mortgage lenders are determining the likelihood of you being able to repay your mortgage, on time. They will expect a timely payment, each month. If your income is not good for 12 months, how can you be expected to make timely monthly payments for 12 months?
Permanent income usually refers to annual income – a job for 12 months out of the year (many lenders will require you to have 2 years of continuous employment in the period directly before applying). This will also mean consistent employment – gaps in your employment history are “red flags.” Your lender wants you to have held the same job for a long time, currently hold said job and continue to hold this job for the foreseeable future.
Stable means that you can depend on it. If you have multiple jobs, you must prove that you can work them all simultaneously. Lenders are looking for long-term, consistent income, not short-term, inconsistent, sporadic jobs.
Your lender does not want to hear – “If I get this job, I will repay my mortgage.” No. The lender wants to hear – “I already have this long-term, permanent, stable job and have saved money, so I can be sure of repaying my mortgage.”
Lenders Vary Dramatically
When you choose from different lenders, you can optimize your chances of getting your housing loan approved. And, when you find a lender who will accept your alternative income sources, you can optimize your “Total Qualification Budget.” This allows you to live in a larger house.
Multiple lenders are like a bushel of apples
When you can choose from multiple lenders, you increase your chances of finding the perfect fit. It is like when you go to the grocery store and can choose from hundreds of apples. You are more likely to find the apple with the perfect shape, colour and crispness.
The same is true for mortgages. You can look for the lender who will accept your alternate income types and offer the best rates. You want the best home that you can afford so that you can enjoy the best quality of life.
Alternate Sources of Income
Sometimes, you cannot qualify for a mortgage based solely on your primary employment income. The more alternate forms of income you list, the better.
We will list the most common alternate sources of income and how most mortgage brokers treat them. Here are the most common alternate income sources:
- Child Support
- Spousal Support
- Maternity Leave
- Self Employed
With each source of income, you will be required to show proof.
Child or Spousal Support
Lenders might accept from 30% to 100% of child or spousal support payments. You must provide court documents or proof of bank deposit.
Maternity leave is a type of Employment Insurance (EI). Some employment insurance might pay you 40% of your normal salary.
Lenders might give you anything from the EI amount up to 100% of your salary upon date of return. You will need an employment letter listing starting date, return date, position and salary.
Some lenders don’t like to accept pensions, or only a portion of them. There are lenders that allow pension income, and in some cases, allow it to be grossed up.
Generally, lenders will require you to have income from sources within the country. They might make exceptions for non-residents, who relocated and are on the path to citizenship. All foreign financial records should be translated into English.
Net rental income can be included as a legitimate source. You might need to show three years of tax return capital gains.
Some lenders say “No” to tips. Others will say “Yes”, if you declared them on your taxes.
Commercial fishermen and teachers don’t work all year long. But, both make sizable incomes during that limited time. They might be able to show that their seasonal work compensates them with wages that are commensurate to annual salaries.
You must have guaranteed hours and wages and a minimum of 3 months for part-time income to qualify.
The Globe and Mail counted 2.8 million self-employed Canadians in 2017. These small business owners create valuable services and create numerous jobs. Unfortunately, some traditional banks do not accept self-employment records.
A Leduc mortgage broker might accept self-employed income. You must prove business ownership using license, accounting or tax records for two years. You should submit T1 generals and Notice of Assessments. There are also lenders that offer a “stated income” solution.
Income Stability & Home Stability
Homeownership in the greater Edmonton area provides you with a more permanent housing situation. It only makes sense that you need permanent, stable income to afford a permanent, stable residence.
With more private lenders to choose from, you naturally have more financing options. The right Leduc mortgage broker for you, might not be the right broker for someone else. And that is fine.
Be upfront, forthright and honest about your income. Giving the lender the best idea of your financial situation will be the best for all parties involved. Remember that lenders can always double-check your credit history.
Permanent, stable, high-paying jobs are the best, but you knew that already. If you have the opportunity to stay with an employer for a long period of time, you should.
Lenders will judge alternative income source legitimacy based on type, the period of time and amount. Prepare documentation to verify your alternative sources of income.
Each mortgage broker will vary, so compare their packages and find the best deal. Advantage Mortgage allows you to compare between multiple lenders, so you can find the best home financing options. So, for additional information, or to answer your questions on alternative sources of income acceptable for mortgages, contact us to discover your options and start dreaming of home ownership.