It’s an exciting thing to find the home of your dreams and apply for a mortgage. Many new home buyers in Kelowna are a bit shocked when they discover the paper work they need to complete when applying for financing, but the lender needs to do a proper evaluation to make sure that the borrower can make payments and manage their debt – not just the debt of the mortgage, but all relevant debt.
So of course they need to know that the borrower’s income is sufficient to make the mortgage payment, which is determined in part by the amount of down payment put down on the property.
Proper verification is required by the lender in accordance with provincial legislation. It is unfortunate that the guideline’s today are strict compared to what they were 20 or 30 years ago; however, illegal activities and all manner of fraud plus high mortgage default rates have required all these extra processes to be put in place.
What is required?
The type of paperwork presented to the lender depends on the borrower’s type of employment and whether they have other steady sources of income.
If you have an employer or have your own business or have income from rental properties here’s an idea of the type of paperwork you should have at the ready:
- A pay stub: Your most recent pay stub or sometimes your most recent three pay stubs are usually required. Many people receive pay stubs through an online portal or ePost and are more easily retrieved. They can simply be printed from your computer.
- A letter from your employer: This information should contain the borrower’s job title, date that employment began, the current annual salary or the number of hours of required employment in a week and the hourly rate of pay. This letter needs to be an original document on letterhead of the employer, and needs to be dated with a signature from an appropriate person such as a human resources representative or the borrower’s supervisor.
- Additional income: In trying to amass as much verifiable income as possible, borrowers also like to produce evidence of overtime pay, Christmas bonuses, profit sharing and income earned seasonally. The paperwork required for this are two years’ worth of Canada Revenue Agency Notices of Assessments to show that fluctuating income can be relied upon from year to year. The Notice of Assessment is what the CRA send out after an annual tax return has been filed and is the federal government’s acceptance of the information you have filed. Another reason for presenting this document is for lenders to see if all of your income tax is up-to-date and that you aren’t in debt to the government. If you have a CRA account you can access your most recent assessment notices from there.
- If you run your own business as a sole proprietor you will also need to produce these documents to show the income that you make. You may also be asked to produce the Statement of Business Activities schedule which would have been filed with the general tax return document to show income and expenses. If there are outstanding taxes indicated on a recent Notice of Assessment then you may need to present further documentation that the tax has been paid, if that is the case.
- If your business is a partnership, limited or incorporated company then you need the whole ball of wax: all of the above plus financial statements from your accredited accountant
- If you want rental income to count towards your total income, you’ll want copies of your lease agreement. In some extreme cases, a lender might want a report from a bank appraiser that shows how much rent is fair from the property or properties that you are renting out. That may be in the case if you already have a property and will be renting it out instead of selling it before making the purchase for which you are borrowing.