What homebuyers and homeowners should know about proof of income

“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

If borrowers have questions about income verification – or any other aspects of applying for a mortgage, they should reach out to a mortgage broker such as an 8Twelve Mortgage Strategist. Mortgage professionals are the experts when it comes to meeting Canadians’ mortgage needs, including mortgage pre-approvals, first mortgages, mortgage renewals and refinancing.