David Larock in Mortgage and Finance
When it comes to underwriting a mortgage application, your income is the straw that stirs the drink. Income has proven to be the lender’s most reliable indicator of loan risk and, as such, the standards set for confirming it are rigorous. Once your exact income has been established, lenders then perform two tests to determine how much money they can safel
Canada’s lenders (and their insurers) have the benefit of decades of mortgage lending experience, and they have used their loan performance data to try to predict how much today’s applicants can safely afford to borrow. Because income has proven a powerful indicator of loan risk, the income tests are sacrosanct The Canadian benchmarks for maximum GDS and TDS ratios originate at CMHC and serve as an industry standard that lenders observe (except maybe within a point or two). The maximum thresholds say that your gross debt service (GDS) costs should not exceed 35% of your household’s income, and that your total debt service (TDS) costs should not exceed 42% of your household’s income. As with any policy, exceptions can be made. For example, some lenders do not use the GDS test as a hard-and-fast rule and in some cases, TDS ratios can be stretched as high as 45%. Generally speaking, the banks are the most conservative when applying their income tests while the non-bank lenders, who offer the same interest rates or better mind you, will sometimes allow a little more flexibility.
When it comes to providing proof of income, standards depend on your type of employment. If you have been working in a salaried job for at least two years where the majority of your income is guaranteed, then confirming your income can usually be done with a job letter, current pay stub, and your most recent two years of Notice of Assessments. Bonus income is generally averaged over the most recent two years. If you work on commission, len
As far as tips go, the best advice any broker can give a client is to be conservative when stating income. Underwriters are only human, and if they start picking apart an overstated income number they may end up using lower earnings than would be the case if you had been more accu
If you are wondering how much your income will allow you to borrow, feel free to check out our online calculator called, “How Much Can I Qualify For?” While today’s post gives you a general idea of how lenders conduct their income tests, the income
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog (integratedmortgageplanners.com/blog). Email Dave