Understanding Income Sources for Mortgage Applications

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When applying for a mortgage, your income is a crucial factor that lenders consider to determine your ability to afford the mortgage. Your income source plays a significant role in this assessment. Here's how lenders typically treat various income sources:

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1. Long-Term Salary:

• A steady, long-term salary is often viewed as the easiest way to qualify for a mortgage.

• Lenders usually require proof of your salary, which can include the past two years of tax assessment statements, recent pay stubs, and a letter of employment.

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2. Commission Income:

• Commission income can be more challenging to assess due to its fluctuations over time.

• Lenders may use an average of your commission income over a specific period to determine its stability.

• A longer history of consistent commissions is generally more favorable to lenders.

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3. Bonuses:

• Bonuses are typically discretionary and may vary from year to year.

• Lenders may consider bonus income if there is a consistent history of receiving them.

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4. Tips:

• If you have declared tips on your tax returns for at least the past year or two, lenders may factor them into your total income.

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5. Self-Employed Income:

• Self-employed individuals can qualify for a mortgage, but the requirements may be more stringent.

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• Lenders may request two years of past tax assessments and financial statements to assess the stability of self-employed income.

• Mortgage default insurance and a larger down payment may be necessary.

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6. Rental Income:

• If you have rental properties, you may be able to include rental income in your mortgage qualification.

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• Lenders typically require proof of rental income, such as rental agreements and bank statements.

• Some lenders may allow you to exempt rental income expenses (e.g., utilities) when calculating debt service ratios.

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7. Child Support and Alimony:

• If you receive child support or alimony payments, lenders may consider this income source.

• Proof of payments is typically required.

• If you are the one making these payments, they may be deducted from your annual income.

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8. Pension Income:

• Regular pension income is generally considered a traditional and stable income source by lenders.

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How Income Affects Mortgage Affordability:

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• Lenders use two important ratios to calculate your mortgage affordability:

  • Gross Debt Service (GDS): This ratio should be around 39% of your monthly household income. It includes mortgage payments (principal and interest), property taxes, heating expenses, and half of monthly condominium fees (if applicable).

  • Total Debt Service (TDS): TDS should not exceed 44% of your monthly household income. It adds other debts like car payments, personal loans, and credit card payments to the GDS calculation.

• Federal government stress-test requirements may further impact the amount for which you can qualify.

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Understanding your income sources and how they affect your mortgage application is crucial for a successful home purchase. I will help you navigate the mortgage process and find the right fit for your unique financial situation. They can also assist you in getting pre-approved for a mortgage, which gives you peace of mind and a strong starting point for your home search.