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 re-financing 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.
Letter of employment
Most recent paystub
Most recent 2 years of T4s
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 re-financing, please do not hesitate to contact me.