One of the most common things home buyers, especially first-time home buyers, need to consider before buying a home is how much income do you need to qualify for a mortgage. Some people think they need more income when in fact they don’t. Others think they earn enough income but if it is commission, self-employed or comes with fluctuating hours it may be considered differently by the lender. It is very important to talk with your mortgage broker to be clear on the source of your income and how you are paid.
I always review how much income do you need to qualify for a mortgage before we look at their credit or down payment. I ask clients if they are paid by salary, hourly, commission, overtime and bonus or if they are self-employed (sole proprietor or incorporated). If you are paid by salary with guaranteed income by way of a job letter and can confirm year to date with a pay stub we can use that income to qualify for a mortgage. If you are paid hourly, commission or self-employed we will need to see more documentation.
In the case where your hours and pay fluctuate or are not guaranteed we need to see 2-3 years of tax returns (T1 General – line 150) to confirm a consistent level of income from all sources and take an average over that time period. This average will be used as the income for qualifying. If income is from self-employment we will use the T1 General income for 2-3 years. Since most self-employed people claim income after expenses to lower their tax bill the income used to qualify may be insufficient. In these cases we will look at lender options where we can gross up the income filed, add back income that has been reduced for expenses (such as use of home, car lease costs and capital cost allowance) or we can access lender programs using stated income. There are tighter credit score, down payment and costs of borrowing for these programs. To learn more about specific requirements give me a call.
The most important point to remember, regardless of your source of income is to know how much income do you need to qualify for a mortgage before you go looking for a new home.