It’s time for another hot question of the week. This is one I get asked ALL THE TIME when I am helping process a mortgage application for my clients. The question simply is “How does my source of income impact my mortgage options?”
Lets quickly talk about what an ‘income source’ is so that it’s easier to navigate the questions that follow. Your income source is the description of how you earn your income. It’s not your job per sae, but it’s HOW your job pays you. Ie. are you a full-time salaried employee, a part-time contractor, or perhaps a self-employed individual? All of these types of ‘income sources’ will mean different things when you are applying for a mortgage. The full-time salaried individual will have a significant advantage over the self-employed as it relates to qualifying for a mortgage.
Here is another question and answer series from a recent conversation taking a mortgage application for a new home purchase.
“Source of Income: How does your source of income impact your mortgage options & what to do”
- Question:Why does source of income affect the mortgage options available to potential homeowners?
- Answer: Lenders look at the source of income to determine how ‘stable’ someones financial situation is and how easy or difficult it will be for them to make payments o their mortgage. Let’s say you are employed full-time in a permanent position (salaried)… the lender has some security that you will have a stable income. The reality is that could change in the very near future but the lenders still prefer this type of ‘income source’. In basic terminology, salaried full-time income = easier to qualify because the lenders like this. Now lets say you are a self-employed or commissioned sales person… You can certainly still get a mortgage, but the lenders are going to ask for a much different set of paperwork and it’s a bit more challenging to get approved. For example: self-employed you will likely have to show 2 years of NOAs (notice of assessments) from the governernment. If you have been in business less than 2 years it’s going to be very tricky to get approved! Another example might be income that’s coming by way of child support payments or alimony. Lenders don’t want to see this as your sole source of income, but they will use it if it’s 30% of your overall income. Bottom line, a mortgage broker can still help you get approved in any situation, it just might be a little more challenging if your situation isn’t cut and dry. More info on income documents here >>
- Question: What do lenders consider traditional salaries/sources of income?
- Answer: Let’s look back at question 1 when we talked a bit about the type of income the lenders prefer. This refers back to salaried full-time income as an employee (remember that stability piece?). Essentially lenders like to use your total income reported on your CRA notice of assessment. This is your reported income and includes all forms of income you may get in a given year. If the numbers fluctuate year to year, they will use a 2 year average of nothing has changed. This is what brokers ask for when they say “I will need 2 years of NOA’s”.
- Question: What sources of income are the most limiting in regards to the amount of lenders and interest rate options that will be available?
- Answer: There can always be exceptions to the rules, but if your sole source if income is foster care income, alimony, or child support, then you’re going to have a really tough time. Anything non-taxable is going to post a challenge. If you have income by way of dividends, rental income, or self-employment income with LESS than a 2 year history, you might be better to wait it out another year until it’s more established.
- Question: How can a want-to-be homeowner best prepare for the proof of income requirements & Are there commonly any hidden surprises?
- Answer: First and foremost, I would say keep your T4s/ NOAs in a safe place. Don’t change jobs or become self employed before applying, and use the income you are actually reporting as your income. Ex if you are self employed and make 100k but declare 15k on your NOA, then your income is 15K not 100K – I see this all the time! Keep track of your numbers and really know what they are so you are armed with as much info as possible when you apply. I have a free checklist to download – get it here!
- Question: In your opinion, what is the most beneficial tool or strategy for a want-to-be homeowner being limited by their source of income?
- Answer: This is such a great question… not everyone has the option of being that full-time salaried employee so it’s important to take other measures to position yourself in the best light when you are applying for a mortgage! Limiting debt, maintaining a good credit, and increasing savings are first and foremost! Stick to your budget and get in the market where you can and move up from there. Often we obsess over properties and homes that just aren’t in our budget ‘yet’. Keyword there us ‘yet’! Get in to the market however you can, build some equity and then move on up!
Do you have more questions about your source of income and what you might qualify for? Reach out anytime!
Want the free document checklist to help prepare you for your mortgage application? Here it is: CLICK HERE