Here’s The BIG Problem With Mortgage Qualifying Income:
In Mortgage qualifying, specifically related to income, there is a two-sided coin: my “income in reality” and “Mortgage income eligibility”.
This can create A LOT of confusion around what inputs to add to an online Mortgage calculator. I think this is especially true if you’re self employed or an independent contractor. Trust me, being crystal clear and honest with my Mortgage calculator inputs are PARAMOUNT to creating an honest Mortgage affordability picture.
Purchasing a home is expensive and emotional. And I’ve seen the heartbreak of investing time, energy, money and a lot of emotional dollars into searching for a home.
Some buyers even have an accepted offer to purchase a home and then are declined on their Mortgage application. Trust me, that’s not something you want to experience because it’s costly and embarrassing.
This can all be avoided with proper Mortgage planning, with an experienced and trusted Mortgage Professional (yours truly!).
And the best way to illustrate this is with a story…
I was speaking with a woman about her and her husband’s Mortgage application, specifically about their income.
She was working full-time with a private company and was paid salary. Mortgage lenders like this income for Mortgage qualifying. It’s permanent, consistent and reasonable to think it will continue to be in the future (although we know that’s not always the case #layoffs).
I asked about her husband’s income. She told me he worked for Alberta Health Services (AHS) as a nurse practitioner, full time.
OK, great! She told me her husband has been working full time hours for the last 14 months. He was paid $X per hour and had been working overtime! The reality is, he has great income.
However, from experience, I’ve been learning that working full time does not exactly mean full time income is eligible for Mortgage qualifying.
I asked her what was his official classification of employment for AHS? She told me he technically was “casual“.
Here’s the lesson in this story:
- Permanent income. With any permanent income, specifically classified as “permanent full-time” or “permanent part-time” or “salary” based pay, the math to calculate the income for Mortgage qualifying is relatively simple.
- Salary income is the before-tax salary income.
- Permanent full time and permanent part time income is the dollar per hour multiplied by the guaranteed hours worked each week multiplied by 52 weeks.
- Variable income. With any variable income: over time, commission, bonus, non-guaranteed hourly income, seasonal income etc. Mortgage lenders require a two year average of this income to be eligible for Mortgage qualifying.
Back to our story …
In reality, this woman’s husband was working full time. Earning very respectable money. However, his income was not permanent or guaranteed. He is a casual employee picking up shifts with AHS.
For this reason, the eligibility of his income for Mortgage qualifying was $0. Mortgage lenders would require a two year average of non-permanent income to be used when purchasing a home.
Think about this from a Mortgage lenders point of view …when lending hundreds-of-thousands-of-dollars to someone, ensuring they can repay the money is important. Frankly, the lenders want to make sure you’re set up for success!!
One reasonable indicator of future income potential is looking into the past. I understand things can change; they always do. In terms of risk tolerance, betting on someone’s income future, looking at the past, I think is more secure than believing what someone tells me about their income future without any history.
Two sided income coin:
As you can see, in reality, this man is working full-time for AHS. The other side of the coin is, for Mortgage qualifying, his income is not supported to have his application approved.
So what’s the solution?
With any shortfall in Mortgage qualifying, adding a co-signer to the Mortgage application in support of the shortfall, is one option.
The second option is Mortgage planning. For these people, I advised to wait another 10 months until there is a two year history of income to assist in Mortgage qualifying.
Shameless Self Promotion:
If you are planning to purchase a home, consider connecting with me to help you understand your Mortgage affordability. I think with the right advice, at the right time, setting up your home purchase to be smooth and enjoyable is best.
E: chad@canadamortgagedirect.com
Direct: 403-809-5447
Talk soon,
Chad Moore
