Acceptable Income When Applying for a Mortgage

When you’re preparing to apply for a mortgage, it’s essential to understand what types of income lenders will consider. Many clients are surprised to learn just how varied and complex these sources can be. While traditional employment is the most common income type, there are other streams that may be eligible, though they aren’t all treated the same way.

In this blog post, we’ll dive into the different sources of income that lenders may factor in when assessing your mortgage application, as well as what you need to know about how they count.

1. Traditional Employment Income

The most straightforward and commonly used form of income is traditional employment. Whether you’re working full-time, part-time, or earning commission-based income, your salary or wages will play a significant role in determining your mortgage eligibility.

This category also includes:

• Bonuses: If you’re eligible for performance-based bonuses, they can be considered as part of your income.
• Overtime Pay: Overtime can also factor into your total income, but it may need to be consistent over a period of time (often two years) to qualify. Lenders want to ensure that your overtime isn’t sporadic before using it in their calculations.

2. Government Support and Benefits

Lenders are often willing to consider government income as part of your mortgage application, but not all government benefits are counted equally.

Examples of government support that may be accepted:

• Employment Insurance (EI): If you’re receiving unemployment benefits, this can contribute to your income, provided it’s a stable and ongoing source.
• Canada Pension Plan (CPP) and Old Age Security (OAS): These are typically considered as part of retirement income.
• Disability Benefits: Income from a government disability program, such as the Disability Tax Credit or any other government assistance, is sometimes considered, particularly for individuals who rely on these sources for long-term financial stability.

3. Family and Legal Arrangements

Income that comes from family or legal agreements may also be counted. While this is less common, some specific forms of support are considered:

• Child Support and Alimony: If you’re receiving child support or spousal support (alimony), it can be included in your income, provided you can demonstrate consistency and legal documentation. Lenders may require a minimum of 12-24 months of history for these payments to count towards your mortgage.

4. Alternative Income Sources

Alternative income streams can get a little more complicated, but they can still contribute significantly to your mortgage qualifications. These sources often require more documentation to prove stability and sustainability.

• Self-Employment Income: For those who are self-employed, lenders typically want to see at least two years of consistent income, backed by tax returns and financial statements. Since self-employed individuals have more control over their earnings, demonstrating a reliable income history is key.
• Contractual or Freelance Income: Similar to self-employment, contractors or freelancers can qualify, but their income must be stable and well-documented.
• Investment Income: This includes dividends, interest, and rental income. Lenders usually require that the income is consistent and may apply specific formulas to assess how much of it is usable for mortgage qualification.
• Foreign Income: For those earning income outside of Canada, it’s possible to use this, but it can get tricky. Lenders typically require a full translation of the documentation and may only count a portion of the income, depending on exchange rates and consistency.

The Catch: Not All Income is Treated the Same Way

While all of these income types may be eligible, they aren’t all treated equally. Some forms of income, like base salary or wages, are straightforward and fully count towards your qualifying income. Others, such as overtime or investment income, may only count partially or require specific proof to be accepted.

For example, cash income (common among small business owners or those who work in the service industry) is often not accepted unless you can demonstrate consistent earnings for a long period of time. Similarly, income from overtime work might only count if you’ve been earning that overtime regularly for at least two years.

Why You Should Work with a Mortgage Broker

Because mortgage lenders have specific guidelines regarding what income they’ll accept—and how much of it will count—working with a mortgage broker can be incredibly beneficial. A mortgage broker will help you understand the complexities of income verification, guide you on the necessary documentation, and ensure that you’re presenting the strongest possible application.

A broker can also help you plan ahead, ensuring that any unconventional income sources, like freelance or foreign income, are properly documented and presented to maximize your mortgage eligibility.

When applying for a mortgage, the types of income that lenders will consider can vary significantly. Traditional employment income is typically the easiest to prove and count toward your mortgage application, but other forms of income like government benefits, child support, self-employment income, and even investment returns may also contribute. Understanding the rules around these different income sources—and how lenders treat them—is crucial to successfully navigating the mortgage application process.

If you’re feeling overwhelmed or unsure about what counts as income in your mortgage application, don’t hesitate to reach out. I can provide clarity, offer guidance on documentation, and help ensure that every dollar of income counts when it comes to securing the mortgage you need for your dream home.

-Denise