In the previous episode, we talked about proving or demonstrating the ownership and origin of the initial payment funds. In this episode four, we will talk about how we should prepare to verify our income. By virtue of being an employed worker or self-employed, the way to verify what you earn will vary, but it will always need to be reviewed by the financial institutions in order to know your repayment capacity of the credit that they will offer to you.
In this regard, gathering everything your lender needs to verify your income is a critical component of mortgage success. The last-minute scramble for documents only adds unnecessary stress, so the sooner you can start collecting the verifying documents you need according to your type of income, the better.
Just as you made a folder to enter the documents that prove your initial payment, create another one in which you put all your income information.
In this podcast we will be making a list of documents, perhaps you want to take pen and paper to make a list that will later be your checklist. We will refer to the document by the name normally used in Canada.
So, the income receipts that Financial Institutions or Providers are generally going to request, either if you are a worker, a commission agent or independent entrepreneur, are the NOA, the General T1 and the T4 or a T4A, depending on what type of income we are talking about. These documents have certain similarities and can easily be confused so it is important to explain the distinction between them.
NOA: Notice of Assessment
It is the document known as the tax return, which is the letter issued to you by the CRA - Canada Revenue Agency or the Federal Tax Agency of Canada, after you file your taxes or tax returns. Your NOA will show you the date your return was assessed and if it has a refund, an amount due, or a zero balance.
If there are any changes to your tax return after it has already been submitted, CRA may also issue a Notice of Reassessment.
T1 Personal General:
The T1 general tax and benefit return is the tax return used by taxpayers to calculate their annual tax liability and obtain federal or provincial benefits, such as the GST / HST credit. It summarizes the taxpayer's income, deductions, and taxes, calculated on the supporting forms and schedules, and calculates the taxpayer's refund or balance due. There are five parts to your T1 form that include identification, total income, net income, taxable income, and a refund or balance due.
Your T1 form and any balance due for each year are due before April 30 of the following year or June 15 for self-employed or common-law partners.
T4: Statement of Remuneration Paid
This document is a summary of your earned income and deductions for each year and it is obtained by all workers who have a contract for salary or hourly income.
This form provides information on the income you earned while working for a specific employer, as well as deductions (i.e., Canada Pension Plan (CPP), income tax, employment insurance, etc.). If you have had jobs with multiple employers over the course of a year, you should have separate T4 forms for each of them.
Your employer is responsible for providing you with a copy of this voucher and ensuring that it is sent to the Canada Revenue Agency or Canada Revenue Agency each year. Similarly, your employer must provide you with a copy by the end of February of each year.
You can also log into "My Account" through the CRA website. You can find your T4 in the “tax information slips” section.
T4A: Statement of Pension, Retirement, Annuity, and Other Income
If you have received any income from self-employment during the past year, you will have to declare it with the T4A form and not with the T4.
While T4 and T4A receipts may look similar, T4 includes payroll contributions that you have as an employee.
Be careful: if you work as self-employed, you may not receive a T4A from all employers or clients. Generally, T4As are only sent by companies that see you as a consultant versus a service provider, so it is not a requirement that they issue it to you. Depending on whether you receive a T4A or not, you are expected to report all business and work income that you earned on your own on the appropriate Tax Form (T2125).
Also, if you are eligible and receiving Old Age Insurance, you will receive a different receipt from the CRA, the T4A (OAS). If you are retired and receive the CPP benefit, the CRA will send you a T4A (P), detailing your payments. You must also report any pension or retirement income on your T4A.
In short, with the T4A form you provide the CRA with a self-submitted or self-submitted record of income earned outside of the typical employer-employee relationship. For those who are self-employed, take into account that the onus is on you to make sure you report promptly. The advantage is that you can deduct business expenses or operating costs to reduce the taxes owed.
In the event that you are a Worker or Employed:
If your income comes from a salary with a specified time contract, we suggest that from now on you gather all the proof of income that you have received and that your employer gives you and consider that you will always need the most recent proof of payment, save them by date in your folder.
OTHER DOCUMENTS to prove your income are:
Employment letter. It is suggested that you request this document when you are closer to start the financing application process, because more recent data and dates will be required from the date on which your mortgage file is integrated. This letter from your employment should contain the following:
It must be on company letterhead and company data
Date of issue
Preferably addressed "To Whom It May Concern"
Your current position or job title
Date when you were hired
If you are a new employee at that company, the lender needs to know if your trial period has already ended
Your annual income, specifying whether it is from salary, hourly or commission. Any additional income such as bonuses we suggest incorporating them, but by making a clear separation from your main income
Clear and complete name of the person signing the letter, as well as his / her information where he can be reached to verify the information in the letter
Remember that the Financial Institution will be able to do a verification of everything that you deliver, so if it does, this data must be available and true.
It is very important to highlight about the extra income, because this is a constant question, so if you want to add your commissions and bonuses, you should also provide the last two receipts of that income, so that the lender can see what you expect to earn with those extras. If your income comes from a part-time commission contract per hour or seasonal employment, you will need that contract (if any) and a letter from the company describing your overtime work and pay stubs to prove your income, since the lender will want to see how consistent your income is.
If you are working under a contract, you must add a copy of that contract, as well as any renewals.
This comment is not related to income, but it is suggested that you have proof of your occupation and, if applicable, income from your previous jobs. It will be important to show 2 years of work, and if you have worked in the same industry as your current job, it is very important to mention it and have proof of it.
Independent Business Owner or Self-Employed:
Can I Get a Mortgage if I’m Self-Employed?
With 15% of Canadians being self-employed, obtaining a mortgage can be difficult for a variety of reasons. The income of self-employed Canadians is often less predictable than those with steady employers. In addition, banks don’t always recognize that those who are self-employed or own their own business often expense as much as possible to save on taxes. With the above challenges, it can be hard for a self-employed individual to secure a mortgage; however, it’s not impossible. Let’s take a look at the options available to a self-employed individual looking to apply for a mortgage.
Over the last few years, Canada’s big banks and trust companies have implemented a large number of strict lending rules. On top of that, in 2014, the Canadian Mortgage and Housing Corporation discontinued mortgages for self-employed Canadians without third-party validation. Before that, if you were self-employed, you only had to state your income. A paper trail wasn’t necessary to back up your claims.
That’s not good enough now. Banks need to know with certainty how much you make. It’s the only way you can prove to the big banks that you’re not at risk of defaulting and worthy of getting a mortgage.
Granted, it is possible to get a mortgage from a traditional lender if you’re self-employed, but any mortgage will be based on the reasonability of income at the time you apply, as well as a strong credit score. This sounds easy enough, but it can put home ownership out of reach for those who are self-employed.
For example, if you have less than a 20% down payment, you need to prove two years of income. Unfortunately, many self-employed people claim a smaller income for tax purposes. If this is you, the big banks will see you as a risk.
Or, the banks might give you a mortgage but only if you have a down payment of 30% or more. But with the strong housing market in Ontario, most self-employed people have not saved up that much for a down payment. As a result, they are unable to qualify for a mortgage.
Mortgage Options for Self-Employed in Canadá, are linked to their ability to validate the income or without income validation.
Validated income means you’ve been in business for two full years, the business is registered as a self-employed proprietorship, you have good credit, and you’ve declared income on your tax returns.
That doesn’t mean you’ll necessarily qualify for a mortgage with a traditional lender; it just means you have proof of income. You still need to earn enough and have enough money saved for the down payment when applying for stated income mortgages.
What if you have no reportable income? The only real option for those who are self-employed and have no reportable income is to use a private lender. A private lender will still want to know that you have an income, but they won’t ask to see the kind of paperwork the banks would.
Of course, in these cases, the interest rate rises, due to the fact that private lenders assume a greater risk, since we are offering them fewer elements on which they can have certainty or confidence about the repayment of the credit that we are offering.
What’s most important for lenders if you’re self-employed and have no reportable income is your credit score, the quality of the property you’re looking at, the location, and marketability.
Because private lenders are not regulated in the same way as large banks and trust companies, they have more flexibility and can offer good terms on their mortgages, and while it is true that the rates are higher than the rates of the Traditional lenders, it is also true that they are in a very competitive market and there are attractive rates for each particular situation.
You may end up paying more interest, but you will also end up with a mortgage.
Two Classic Mortgage Scenarios for Self Employed
1. Self-Employed with Bad Credit
Having bad credit can make it very difficult to secure a loan from a traditional lender. In addition to being self-employed, which the banks view as risky, bad credit suggests there is an even greater chance you’ll default on a mortgage.
A private lender, on the other hand, is much more concerned with your current and future earnings than past mistakes. Your credit score may be bruised, but private lenders will still help you secure a mortgage if your business is profitable and you have steady income.
2. Self-Employed with Low Income
If you’re self-employed and report low income, you can still qualify for a mortgage. There are a large number of private lenders that will help you secure a low-income or even no-income mortgage.
Again, private lenders understand that most self-employed Canadians try to minimize their taxable income. Private lenders know the difference between reported income and gross income. In fact, some private lenders will add 10% or 15% onto the reported income if you can show business deductions that are equal to or greater than that. This can significantly increase your mortgage eligibility.
The documents that you will need, regardless of whether the lender may later request other documents according to each case, are the following:
1. Evidence that your HST and/or GST is paid in full
2. Notices of Assessment
3. Contracts showing expected revenue and past revenue for the last two years
4. Personal and business credit scores
5. T4A: As we already mentioned, as self-employment, your client can give you a T4A, but if this does not happen, you must make a declaration of business and work income on your own using the corresponding Tax Form, identified as T2125.
6. Financial Statements: In case you have a company that receives the income, you will also need to prove two years of income, but in this case, the proofs are the Financial Statements of the Company of the last two years.
Financial statements are a set of documents that show the current financial status of a company. Specifically, these statements indicate:
How much money is earned and spent, shown in the income statement,
What the company owns and how much it owes: shown on the balance sheet,
Where the money came from and where it went: noted in the statement of changes in financial position, and
The amount of money the owners keep in the business, shown on the statement of retained earnings.
7. Business License and Articles of Incorporation: The business license is your registry as self-employed or licence to do your business. In the case of a company, you must submit the articles of incorporation.
Factors To Increase Your Chances of Approval
There are some steps you can take to make yourself more attractive to a mortgage lender, including having a high credit score, offering a larger down payment, having lots of capital or cash reserves, paying off your debt, and ensuring your records are accurate and up-to-date. Let’s take a look at some of these factors in more detail.
1. Your Credit Score
When it comes to applying for a mortgage, whether you’re self-employed or not, your credit score plays an important role in your approval. Paying off your credit card debt, accepting credit increases and not surpassing them, ensuring debts never go to collections, and paying off bills like rent, phone plans, cable, etc. on time are all great ways to increase your credit score. If your credit score is high, you will be more attractive to a lender and might even qualify for lower interest rates.
2. The Down Payment
The more equity you have in your home, the less likely you are to abandon it in times of financial hardship. If you put a bigger down payment on your home, the bank will likely see you as less risky, since you put down a lot of money from the beginning. Moreover, with a bigger down payment, the amount of money that the lender gives you is smaller, resulting in more affordable monthly payments.
3. Paying Debt
The less debt you have, the easier it will be to make your mortgage payments. It’s a good idea to settle as much debt as you can to free up your money to pay your mortgage.
4. Self-Employment History
Keeping accurate records of your self-employment will establish a strong track record. Banks are more likely to lend to you if you can prove that you have been successful in your self-employment. If possible, try to have at least two years of self-employment history under your belt before applying for a mortgage. However, be sure to keep an eye out on interest rates. If the rates are low, it might be worth applying for a mortgage even if you don’t have all of your history documented.
Make sure to keep your tax and business records accurate and up-to-date. Disorganized records might make a lender less likely to trust your ability to carry a mortgage. To encourage more trust from a lender, ensure your records are in order before applying for a mortgage.
And finally, we have to comment on some special cases.
1. If you have income other than those already mentioned that comes from other sources of income, be sure to report it, for example, if you receive child support.
2. If you got divorced or are in the process of separation it is important to have a copy of the separation and divorce agreement with three to six months of bank statements to show that support is paid.
3. If you have a permanent disability, you must discount 30% approximately of your total income, obtain a letter confirming the status of that disability, and carry a pay stub.
4. If you are on maternity leave, the lender could use your full employment income, if you can bring an employment letter confirming your plan to return to work within a year and,
5. Finally, if it is determined that you do not have enough income to qualify for the amount of the mortgage you want, you can always check with the family to see if they can integrate as co-owners within the property title with you so that you can use the income of your family member to help you qualify.
Very well, we know that it is a lot of information, we suggest you re-listen to this podcast as many times as you need and take notes to organize your own checklist and file folders. Do not hesitate to contact us to support you with that and with any questions you may have. We do it for free!
In the next episode we will talk about an equally important aspect in this series of Podcasts, it is about proving your credit history.
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