How To Properly Plan Your Personal Income For Mortgage Approval So You Avoid The Heartbreak Of Losing Your Dream Home.

People.  Pay attention to this because it’s a very common misconception in the Calgary Real Estate marketplace.

This is one of my most common sentences throughout my day,

The income I earn in reality is often different than the income eligible for Mortgage qualifying.

This can be a major source of frustration because you know you can afford the home you want.  You’ll make payments.

However, there are certain rules, that if you understand them well ahead of purchasing a home, your expectations will match your Real Estate ambition.

I think the best way to explain these income planning strategies is through story …

Story #1: How Bonus Income Can Instantly Vanish, But Still Be There?

I’m speaking with a client, James (not real name), and we’re discussing his income for Mortgage qualifying.  Things are very positive …he’s an engineer, earning a salary plus bonus.

In Mortgage qualifying, salary income is relativley simple to verify.  We simply need two pay stubs and a letter of employment.  This shows the Mortgage lender your ability to qualify to repay your Mortgage.

Any variable income, in James’s case, his bonus income, can also be used in Mortgage qualifying.

NOTE: variable income requires a tw0-year taxable income average to be eligible for Mortgage qualifying.  Verifying this income is found by taking an average of the clients Notice Of Assessment (NOA) income for the past two years.

Things are lining up very nicely for James!  Here’s what happened …

James changed companies.  He went to smaller engineering firm that paid him a lower salary with potential for larger bonus income.

Verifying his salary income is still the same.  Two pay stubs and a letter of employment.

However, his bonus income is now ineligible for Mortgage qualifying.  It’s still there.  I get it.  However, using a two year average of variable income requires the client to be with the same employer for two years!!

James changed employers and therefor changed his stopwatch on his two year income.

The good news is, James wife was also on the Mortgage application.  Their combined verifiable income qualified for their home purchase, no problem.

The lesson from this first story is to be aware of income eligibility and how a simple job change could change your Mortgage qualifying.

Story #2: What You Need To Be Aware Of When Changing Employment Type?

I think this next story is becoming more and more common in Calgary, and the Western employment world.  This story is about a former employee (in the traditional sense) now working as business for self or an independent contractor (either incorporated or sole proprietor).

Check out my in-depth article on Mortgage qualifying as an independent contractor.

Meet Aaron (not real name).  Aaron was also an employee of a engineering firm in Calgary’s O & G vertical.  Again, Mortgage qualifying as an employee is pretty straight forward (two pay stubs and a letter of employment).  However, Mortgage qualifying as an independent contractor is much different.

Here’s why …

Traditional income qualifying, as a self employed person, requires a tw0 year average of your taxable income.  This is found by looking at your T1 General Income Tax Return and corresponding Notice Of Assessment (NOA).

Your T1 General is the document you submit to Canada Revenue Agency (CRA) that distinguishes how much and how you’re claiming your personal income (dividends, T4, investment income etc).  CRA reviews what you’ve returned as your personal income, then replies with a notice of assessment.

The taxable income on your two most recent years Notice Of Assessment (NOA) is how traditional eligible Mortgage qualifying income is found for a self employed individual.

(learn about non-traditional income qualifying for self employed people here)

Back to Aaron’s story …

Aaron was actually laid off in the downturn of Calgary’s economy.  When re-entering the workforce, he was hired as a contractor.  His employer wanted to pay Aaron’s corporation and not Aaron as an employee.

Aaron now needs to be aware of income tax planning and how that fits into his home ownership goals.  Here’s why …claiming high personal income exposes me to high personal income tax.  Retaining revenue in my corporation limits my exposure to personal income tax, leaving me with a much lower corporate income tax rate.  The rub is, traditional Mortgage qualifying is a challenge.

If this is you, perhaps my full article on independent contractors would be beneficial?

Story #3: Becoming An Employee Does Not Mean Instant Mortgage Approval.  Here’s Why:

This is a story of becoming an employee, but not instantly being able to qualify for a Mortgage, even with a full time salary income.

In my previous two stories, I’ve told you the simplicity of Mortgage qualifying as a salary employee.  What’s happening in this story is Kyle (everyone meet Kyle (not real name)) has moved from a 100% commission position within a company, into a salary position.

When Mortgage planning with Kyle, here’s what happened …

I have two pay stubs and a letter of employment from Kyle.  However, Kyle’s company is relatively small and understandably using a small payroll servicing system.

I had the incleing that Kyle’s income would not be a slam dunk so I called around speaking with some of my Mortgage lenders.

Here’s what I heard back …They wanted to see what Kyle’s previous income was while he was a commission employee.  They wanted some context of his previous earnings.

As a result of this investigation, the Mortgage lenders wanted to see three months history of Kyle’s payroll deposits, verified with pay stubs and bank statements showing the deposits.

Yes, he is a salary employee now with traditional income verification documents.  However, Mortgage income qualifying is fluid and responsive to each applicant.  There are fundamental rules-of-thumb for Mortgage qualifying income, but  the reality is each Mortgage application is underwritten on a case-by-case basis.

Epilogue

With change comes opportunity.  Changing employment can help or hurt your income in Mortgage qualifying land.  I hope these three stories help you understand how any future change in your employment structure might effect your plan to purchase a home (or give you options at Mortgage renewal).

I think the best thing you can do today is connect with me personally about your home purchase plans and income structure.  I can help you understand “what’s so” today and how any changes you see in your near term future might change your plans.

The quickest way to get a hold of me is contacting me directly OR filling out this simple form.

Direct: 403-809-5447

Email: chad@canadamortgagedirect.com

Thank you and talk soon,

Chad Moore