How does your employment affect your mortgage application? Your employment as well as job stability are two of the most important details that lenders will evaluate when you apply for a mortgage. This can make the difference between being approved or not approved for the mortgage amount you desire. The ability to show the lender that you have a steady income is crucial.
Before we answer the question of, 'How does your employment affect your mortgage application?', it’s important to first know how a lender determines if you are eligible for a mortgage.
Each lender has their own guidelines when it comes to mortgages. You may be approved by one lender and not approved by another. Or you may see different preapproval amounts amongst different lenders. Mortgage guidelines can change from lender to lender however there may be some commonalties amongst the different lenders' policies. Here are some of the main criteria that a lender will review when determining your credit worthiness.
Your credit rating is a number that a lender uses in determining if you are strong or weak at managing your finances. The lower the credit score is the more risky you are for the lender. Most lenders have a minimum credit score requirement. Within the credit report is also a detailed breakdown of who has been checking your credit. Plus, a breakdown of your individual credit items and your repayment history. Your credit score is a very large factor in determining your credit worthiness for a new mortgage.
There are two main credit bureau companies in Canada which are Equifax and Trans Union. And Equifax credit bureau is out of 900 points. Typically anything above 680 is considered good.
The loan to value looks at the size of the loan in relation to the value of the home. For example if you are buying a home and putting 5% down then your loan to value is 95%. With that, the mortgage is 95% of the value of the home.
When purchasing a home in Canada the typical minimum down payment is 5% of the price of the home. However, there are options to obtain a mortgage with no down payment saved.
When refinancing, typically a person can borrow up to 80% of the value of a home through traditional landing and up to 85% of the value of the home through alternative or private lending.
A borrower's capacity to pay the mortgage is one of the lender's main focusses. There are a variety of factors that help determine borrower capacity. Factors include income, assets and liabilities. Within your income to lender is looking for stability in your income and employment. For your assets and liabilities the lender wants to see that you not only can save for the down payment but can save for closing costs and emergencies as well.
In helping the lender determine your credit worthiness or capacity, your annual income is a large component of this. The more consistent your income, tenure and stability in your employment the ￼better. Within your income the lender is looking for ￼stability. Being new to your employment is fine as long as your income is guaranteed. For most non-salaried employment, such as self employment, a lender will use an average of the last two years of your income.
Learn more: Self employed mortgage
In Canada, in general, a person can qualify for a home about 4.5 times their annual income. Therefore if you earn $100,000 as an individual or a total for the household, you may be able to purchase a home up to $450,000. This of course can vary from applicant to applicant depending on your debts, down payment amount and the property itself.
From this you can see that the higher your income, the higher the purchase price you may achieve. Also in working the formula backwards if you see a house you desire such as a house priced at $500,000 if you divide this by 4.5 you will discover the income that is approximately required to achieve this home.
If you are salary plus bonus, a lender will typically use your set base salary and then a two-year average of the bonus.
Banks and lenders are less focussed about how big your income is and more focussed on the stability of your income. Would you rather lend someone who sporadically gets $50,000 here and there throughout the year or someone who has a guaranteed consistent income month to month.
A lender will typically ask for a letter from your employer noting your job stability such as having a permanent full-time position.
A lender has a responsibility to ensure that during your time in the home, you can easily make the mortgage payments. They would never want to put a client in a situation where income becomes a challenge and therefore making the mortgage payments becomes a challenge. Defaulting on a mortgage of course is a large burden on the client as well as the lender. Even though the lender is using the home at security, the lender still wants to make sure that you will have many happy years ahead in the home without problems affording the mortgage.
This is perhaps the easiest employment to verify as your income is guaranteed full-time permanent and your pay is the same from paycheque to paycheque. Typically for this, a lender will want a pay stub as well as a letter from your employer. The letter from your employer is to confirm your full time permanent status.
If you have been with the same employer for at least two years and have been getting a bonus or commission for at least two years than a lender will typically use your base annual income plus an average of the bonus or commission for the last two years. If you are new to the bonus or commission then a lender will typically only use the base salary. Also if you’re new to the employer, the lender will only use the base salary. In this situation they will want a pay stub as well as a letter from your employer detailing your base annual income and bonus structure.
For those on contract, the lender needs to see a two year tenure with the current employer. This can create challenges for those who are new to contract employment. The lender's goal is to see not only the tenure but what your income has averaged over the last two years. With that, you would need two years of tenure. If thinking about buying a home and changing employment to contract employment it would be best to speak to an Ottawa mortgage broker first to ensure challenges can be avoided.
Learn more: How to find the best mortgage broker in Ottawa
Part time employment is perfectly acceptable to a lender as long as it is permanent part time employment. For this a lender will look to a letter from your employer guaranteeing your annual income. Plus, they will require a current pay stub. If your part time employment is not guaranteed, a lender may not be able to use this income in the application.
For hourly employees, typically a lender needs to use an average of your last two years income with that same employer. If you do not have to years tenure with the simpler than the lender will typically look to see what your guaranteed minimum hours and pay will be. If there are no guaranteed minimum hours and you do not have two years tenure, a lender may not be able to accept this income in an application.
Most lenders cannot except the income from an applicant who is on probation. This is why an income letter is typically required for all employment where there is an employer, as they want to see if you are a permanent or on probation. If you are on probation, it would be best to set your closing date till after your probationary period is over.
The lender typically cannot use employment from an applicant that is not guaranteed. If you are in a casual or temporary position, the lender may not be able to use this income in the application. Depending on your tenure as a casual employee, lender may be able to consider using a two year average if you have been doing this for a number of years.
Self-employment is look at the most thorough. The lender's goal is to assure that there is a pattern of income as well as the potential for future income through your self employment. For that, a lender will be looking to use a two-year average of your net annual income. There are other programs available for self-employed mortgage applicants where they can top up the net income or use a gross income. Mortgage brokers in Ottawa will be able to review these options with you in great detail.
In addition to the typical documents required for a mortgage application such as down payment verification, a lender will also need documents for your employment. Typically if you have an employer, a lender will need a letter from your employer as well as a recent paystub. For all other employment a lender will typically require your last two years of T4’s, T1 Generals or Notice of Assessments.
There are a few things that you can do to help ensure that your application still gets approved even if you are new to your current employment.
The first thing is to assure that the mortgage you are requesting aligns with your current employment income and your current debts. This affects the debt to income ratios that lenders need to follow. If your new employment comes with lower income than your previous employment, you may need to reduce the mortgage amount that you are applying for.
The next step is to prove to the lender that you have security. The lender will want to see guaranteed hours or a guaranteed income amount in your current role. This is easy to confirm when your are full time permanent with a guaranteed position. However, for those not with a guaranteed salary, a lender would like to see verification from your employer of your guaranteed minimum annual income.
Making a larger down payment can assist in lowering the amount that you need to borrow. Also if you do not qualify for traditional lender, putting down 15 to 20% can allow you access to mortgage solutions with alternative and private lenders. Plus when putting 20% or more down you do not have to go through a mortgage insurer (ie CMHC) and with that there may be more leniency with the lending. For example, you can now go with an amortization up to 30 years. ￼
Having all the documentation ready can assist in not only saving time but helping you achieve an accurate lender review upfront.
Also, having a cosigner can assist with adding support to the application while you are building tenure in your new role.
The more stable your job and larger income to contribute to the debt to income ratio, the better the interest rate may be for your mortgage. Also the better the chance that you will be approved for a mortgage. If you are able to qualify for many different lenders options, this will allow you more options to choose from and a better interest rate selection.
Contact me anytime to learn more and help answer the question of, 'How does your employment affect your mortgage application?'.