“How much do you make?” is an awkward question, but homebuyers and homeowners must be prepared to answer – and back up their number with evidence – if they want to apply for a mortgage, pre-approval, refinancing or renewal.
Income verification is a key step in mortgage qualification. Lenders use a prospective borrower’s income and debt to calculate Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, which determine how much of a mortgage they can afford.
Here’s the income-verification documentation applicants should have ready when applying for a mortgage, pre-approval or refinancing.
For full-time, salaried employees
If you work on-staff, you should collect this documentation:
- Pay stubs or slips;
- Canada Revenue Agency (CRA) Notice of Assessment;
- Letter of employment confirming their position, annual salary and how long they’ve been with the company.
If they’ve recently started a new job, the letter of employment should also state whether or not their probationary period is over. Commissions and bonuses can be supported via the Notices of Assessment.
For part-time, seasonal or contract workers
Here’s the income-verification lenders will expect if you don’t work full-time:
- Pay stubs or slips
- Canada Revenue Agency (CRA) Notice of Assessment
- Letter of employment confirming applicant’s position, average weekly hours, pay rate, year-to-date earnings and status (i.e. permanent or temporary)
- For contract workers, a copy of the contract and any renewals
Income should be consistent and can be proven with a two-year average of tax assessments or T4s.
For the self-employed
If you’re self-employed, a freelancer, a small business owner, or gig-economy worker, here’s what you will need to produce:
- Two years of CRA Notices of Assessment
- Two years of T1 general tax returns; if incorporated, two years of accountant-prepared financial statements
- Business license of articles of incorporation.
Mortgage applicants may potentially be asked for additional types of documentation. Many borrowers find it worthwhile to work with a mortgage broker who knows the ins and outs of self-employed mortgages, especially since many self-employed Canadians optimize tax write-offs, which can have the effect of lowering net income.
Other income sources
Borrowers should not forget to provide proof of these other sources of income, if applicable:
- Child support – a copy of the separation/divorce agreement and three to six months of bank statements
- Disability – letter of status from their doctor and proof of payments such as bank statements
- Parental leave – some lenders will recognize full employment income if a letter of employment confirms a return date within one year
- Pension, Registered Retired Income Fund, investment income – most recent tax assessment and/or T4As for pension income