THIS vs THAT 11 | Verified Income vs Stated Income

Michael Hallett • Sep 28, 2018
Income is income. Yes and No. The underwriters that work for the lenders are mandated to constantly assess the risk level of each client. They are tasked with determining the probability of the borrower repaying the mortgage amount on-time, plain and simple. As income earners there are many ways to structure how we are paid.

In the mortgage industry there are basically two different classifications for earning an income; employee or employer/self-employed.

For an employee we consider one’s gross income as verified income. This is the total income reported to Canada Revenue Agency (CRA) from January 1st to December 31st in any given year. The income amount is documented on T1 Generals, T4s and Notice of Assessments, it’s referenced LINE 150. We utilize this line item amount to qualify the mortgage amount. There isn’t anything we can change.

Self-employed income earners file the same taxation documents with CRA. But as a self-employed person there are tax rules that allow business owners to reduce their reported income through write-offs (for further details please consult your certified accountant). When a self-employed mortgage consumer needs to qualify for financing we utilize the same LINE 150 income. Depending on how their accountant has structured their income will determine their borrowing power through the verified income process. If the gross annual income is too low to qualify for the required amount, we can proceed with a process called stated income. This takes a further examination of their financial documents to determine if any of the write-offs can be added back to the total income.

Going with a stated income mortgage product will end up costing a bit more, but the borrower can qualify for a higher mortgage amount. This may be the difference between ultimately buying or refinancing into exactly what they want.

As mortgage consumers the lenders require us to provide documentation to upon borrowing money for purchasing or re-financing real estate. The lists are slightly different depending on one’s income classification.

Employee:

Letter of employment
Most recent pay stub
Most recent 2 years of T4s
Self-employed:

Most recent 2 years of Notice of Assessments (issued by CRA)
Most recent 2 years of T1 Generals along with Statement of Business Activities
Most recent 2 years of accountant prepared financial statements, if incorporated
*The combination of documents can vary from lender to lender.

If you have any questions on how to structure your income to plan for a future real estate purchase or refinancing, please do not hesitate to contact me.

SHARE

MY INSTAGRAM

MICHAEL HALLETT
Mortgage Broker

LET'S TALK

Protect Yourself at Renewal

By Michael Hallett • 15 May, 2024
It’s a commonly held belief that if you’ve made your mortgage payments on time throughout the entirety of your mortgage term, that the lender is somehow obligated to renew your mortgage. The truth is, a lender is never under any obligation to renew your mortgage. When you sign a mortgage contract, the lender draws it up for a defined time, so when that term comes to an end, the lender has every right to call the loan. Now, granted, most lenders are happy to renew your mortgage, but several factors could come into play to prevent this from happening, including the following: You’ve missed mortgage payments over the term. The lender becomes aware that you’ve recently claimed bankruptcy. The lender becomes aware that you’re going through a separation or divorce. The lender becomes aware that you lost your job. Someone on the initial mortgage contract has passed away. The lender no longer likes the economic climate and/or geographic location of your property. The lender is no longer licensed to lend money in Canada. Again, while most lenders are happy to renew your mortgage at the end of the term, you need to understand that they are not under any obligation to do so. So how do you protect yourself? Well, the first plan of action is to get out in front of things. At least 120 days before your mortgage term expires, you should be speaking with an independent mortgage professional to discuss all of your options. By giving yourself this lead time and seeking professional advice, you put yourself in the best position to proactively look at all your options and decide what’s best for you. When assessing your options at the time of renewal, even if the lender offers you a mortgage renewal, staying with your current lender is just one of the options you have. Just because your current lender was the best option when you got your mortgage doesn’t mean they are still the best option this time around. The goal is to assess all your options and choose the one that lowers your overall cost of borrowing. It’s never a good idea to sign a mortgage renewal without looking at all your options. Also, dealing with an independent mortgage professional instead of directly with the lender ensures you have someone working for you, on your team, instead of seeking guidance from someone with the lender’s best interest in mind. So if you have a mortgage that’s up for renewal, whether you’re being offered a renewal or not, the best plan of action is to protect yourself by working with an independent mortgage professional. Please connect anytime; it would be a pleasure to work with you!

The Property Matters in Mortgage Financing

By Michael Hallett • 08 May, 2024
When looking to qualify for a mortgage, typically, a lender will want to review four areas of your mortgage application: income, credit, downpayment/equity and the property itself. Assuming you have a great job, excellent credit, and sufficient money in the bank to qualify for a mortgage, if the property you’re looking to purchase isn’t in good condition, if you don't have a plan, you might get some pushback from the lender. The property matters to the lender because they hold it as collateral if you default on your mortgage. As such, you can expect that a lender will make every effort to ensure that any property they finance is in good repair. Because in the rare case that you happen to default on your mortgage, they want to know that if they have to repossess, they can sell the property quickly and recoup their money. So when assessing the property as part of any mortgage transaction, an appraisal is always required to establish value. If your mortgage requires default mortgage insurance through CMHC, Sagen (formerly Genworth), or Canada Guaranty, they’ll likely use an automated system to appraise the property where the assessment happens online. A physical appraisal is required for conventional mortgage applications, which means an appraiser will assess the property on-site. So why is this important to know? Well, because even if you have a great job, excellent credit, and money in the bank, you shouldn’t assume that you’ll be guaranteed mortgage financing. A preapproval can only take you so far. Once the mortgage process has started, the lender will always assess the property you’re looking to purchase. Understanding this ahead of time prevents misunderstandings and will bring clarity to the mortgage process. Practically applied, if you’re attempting to buy a property in a hot housing market and you go in with an offer without a condition of financing, once the appraisal is complete, if the lender isn’t satisfied with the state or value of the property, you could lose your deposit. Now, what happens if you’d like to purchase a property that isn’t in the best condition? Being proactive includes knowing that there is a purchase plus improvements program that can allow you to buy a property and include some of the cost of the renovations in the mortgage. It’s not as simple as just increasing the mortgage amount and then getting the work done, there’s a process to follow, but it’s very doable. So if you have any questions about financing your next property or potentially using a purchase plus improvements to buy a property that needs a little work, please connect anytime. It would be a pleasure to walk you through the process.
Share by: