Your Income and Employment
With any loan or mortgage, a critical factor is how you will pay it back. Your income history is important to a mortgage lender. In this chapter I will cover the two types of income the banks want to see with everyone that is applying for a mortgage.
This type of income is described as working for someone who is collecting and paying your income taxes and other benefits to the government.
You receive a regular check weekly, every two weeks, twice a month, or in some cases once a month.
This employer collects the income taxes and pays them to the government for you. This is the standard definition of employment income.
Some folks are paid on a contract basis. If the contract includes the company paying your personal taxes and other benefits for you, then this is considered regular employment.
If you are required to collect and pay your own taxes and benefits the lenders consider you to be Self Employed. This is the second type of income allowed.
The simple definition of being self-employed is to ask yourself “Who pays my taxes to the government”?
If the company pays it then you are employed, if you pay it then you are self-employed.
If you incorporated a company and your T4 yourself and you can prove that the company pays your income taxes each month then you will be treated similar to an employed person.
In most cases you will be asked for your last two years personal income taxes to prove a 2 year average of your income.
What type of paperwork will you need to provide to prove your income?
Employed people will need to provide a job letter that states your position, salary, and your length of employment.
You will also be required to provide a copy of your last one or two paystubs to confirm the information on the job letter.
All lenders will take the extra step to call and confirm the information on the job letter and on your pay stub.
If you are on a probation period of any sort, you must be out of the time period before a mortgage will be granted.
The lenders want at least a 3 year work history so be prepared to provide that history in detail.
Self Employed Income:
For self-employed people the paperwork needed is more intense. The reason for this is that your income is much more difficult to prove as many people will try to write off as much as they can. This reduces your total annual income and what you owe the tax man.
The problem here is that the lenders require a two year history of your self-employed income. If you write off everything to lower your declared income this means your income for qualifying will also be very low and limit your ability to buy your new home.
Self-employed people will need to provide their last two years personal tax returns and your personal Notice of Assessments. These are the forms you get back after you file your tax returns. The Notice of Assessments proves the government agrees with your last tax return.
Most lenders will also ask for 1 to 2 years of your company business financials as well to prove the company actually exists. They want to ensure you are the one of the owners of the company and that the company is a profitable venture.
You will also be required to prove that you do not owe any taxes to the government. If you do owe them then you should make arrangements to pay any outstanding taxes before applying for a mortgage.
The reason for this is because only the government can seize your home above the bank. If you fail to pay the government they can force you to sell your home in order to pay these taxes. Lenders hate this so they ensure you do not owe any before granting a mortgage.
Normally lenders will require two full years of tax returns from the business
Since you are new in your business the lenders want at least a two year history to prove the income you make in your business. If you have been in business this long you have no issue.
If you have less than 2 years in business it becomes very difficult to provide a two year history.
Some lenders will allow you to use employment income from the previous year if you are in the same field as you were currently self-employed in. For example if you were a plumber working for a company and then started your own company, some lenders will allow you to use your last year of income and your first years income from your self-employment to calculate a two year average.
This still means you must have at least one year personal taxes to prove you have been in business for one year. Then they will allow you to use your last year’s income from your job as long as it was in the same field and you can provide proof of this.
There you have it
There are many types of incomes that we earn in life but they all fit into one of these two categories. I can already hear you state “but mine is”. Unfortunately the lenders only see these two categories and will fit you into either one once they are given the proof listed above.
Now is a good time to gather your paperwork if you are self-employed and provide it to your broker or banker to review ahead of time.
The reason for this is to avoid wasting your time finding a new home only to find out you can’t qualify.
I would be pleased to discuss this further if you are looking to buy in Canada. Unfortunately I am unable to do mortgages in the USA so I can’t really help you with qualifications in this area.
If you are buying in Canada please don’t hesitate to e-mail me at:
Daryl@maxmort.ca or visit our website at www.maxmort.ca