Income & Debt

Income, Debt & Mortgage Qualification

To mortgage-qualify in Canada, for the most part you have to prove you reliably make money "sufficient to service your debts." That means steady and predictable income sufficient to cover all your payments, including loans, credit cards, credit lines, support, etc. and – of course – the new mortgage payment and property taxes.

The maximum mortgage that you can be approved for is determined by a maximum ratio of monthly debt payments to monthly income. This means if you have a lot of debt and payments given a fixed amount of income, there might not be enough left over for the home you’d like to buy.

Table of Contents

1. What is Classified as Income for Qualifying Purposes?
2. About Debt and Debt-Servicing-Ratios
3. Self-Assessment - Is Your Income Okay?
4. More Resources on Income & Debt 
5. Return to 'Can I Get a Mortgage' Overview Page

What is Classified as Income for Qualifying Purposes?

Some forms of income that represent revenue to your household may not count as income for qualification purposes. Here are some of the many sources of income and some of the guidelines for using them to qualify for a mortgage. The important thing when it comes to income is to demonstrate consistency and sustainability.

Employment Income - If you are an employee of a company or corporation, the basic guideline for income
eligibility is that you have been employed for one year with the same employer or at least one year in the same line of work with no probationary period on the new employment.

• Irregular Income such as non-guaranteed hours, overtime, seasonal income, bonuses, tips (provided they are claimed, commissioned sales or short-term contracts are usually acceptable, but you will likely be required to demonstrate sustainability by providing a two or three year track record with the same employer and the average of income over these years would be used for qualifying purposes.

Self-Employed - If you are self-employed, you can still qualify provided you make money and have a track record of consistent income. The standard is a two year average of your net taxable income as shown on your personal tax returns. It gets complicated if the income you show on your personal income taxes is low.

Pension & Disability Incomes - Guaranteed pension and permanent disability incomes are usually acceptable sources of income.

Alimony & Child Support - If you are receiving regular alimony or support payments per a court order or enforceable (written and signed) separation agreement or divorce decree, those payments can contribute up to 1/3rd of your total income mix. Canada Child Benefits are less and less acceptable as income sources for most traditional lenders these days.

Other Income - any other income that is legal, documented, and considered permanent/ likely to continue can be considered. See this article for further discussion.

Important to note - there are many mortgage lenders and each lender publishes specific guidelines as to what they will and will not consider as acceptable income. A mortgage broker can help identify which lenders are more favourable than others for your situation, if need be.

Debt and Debt-Servicing-Ratios

Above, we mention that your income must be "sufficient" to pay or service your debts ... what does that mean?

The amount of mortgage you may qualify for depends on two things: 1) the income you can demonstrate, and 2) the amount of debt you are carrying. Financial institutions use two different ratios to measure your borrowing ability. The first is your Gross Debt Service Ratio (GDSR). The second is your Total Debt Service Ratio (TDSR).

The intent of calculating and enforcing these ratios is quite simple - lenders (and the Canadian Government) want you to be able to afford all your bills and payments, hence stay out of financial trouble.

The Gross Debt Service Ratio (GDSR) is the percentage of your gross (pre-tax) income required to cover home-related costs, such as the mortgage, property taxes, home heating, and 50% of any condo fees.These home-related expenses generally can not exceed 35-39% of your gross income, with some exceptions permitted for larger down payments (>20%).

Total Debt Service Ratio (TDSR) is the percentage of gross income required to cover home-related costs (mortgage payments, property taxes, heating, and 50% of condo fees, if applicable) plus all of your other debts, such as credit cards, vehicle payments, lines-of-credit, any other loan, alimony or support, etc. The total of your expenses generally can not exceed 42-44% of your gross income, with some exceptions permitted for larger down payments (>20%) and exceptional credit.

Application of Debt Servicing Ratios and Why it Matters

For simple math, let's say two couples can each prove gross household income of $10,000 per month before taxes. With a TDS limit of 44%, that means their total debt payments (including the new home mortgage, property taxes and heat) cannot exceed $4400/month ($10,000 x 44%).

Couple 1 Analysis: Given their relatively low debt load of $1000/mo and based on $10K/mo income, they have debt-servicing head room of $3400/mo left over for a mortgage, property taxes, and heat. At today's interest rates, that might allow them to qualify for a $550K mortgage assuming they had a down payment and wanted to spend that much.

Couple 2 Analysis: Given their relatively high debt load of $3050/mo and based on $10K/mo income, their remaining debt-servicing head room is $1350/mo to cover the mortgage, property taxes, and heat. If $350 of that goes to property taxes and heat, the remaining $1000 would equate to a home purchase mortgage of ~$200K.

As you can see, a high debt load means a smaller mortgage. Tip: couple 2 may want to consider consolidating their credit card and line of credit balances into a single loan with a structured repayment program to improve their ability to mortgage qualify. You can read more about personal consolidation loan products here.

FYI - there are many mortgage lenders and each lender publishes specific guidelines as to how they will calculate your repayment obligations. A mortgage broker can help identify which lenders are more favourable than others for your situation, if need be.

Income & Debt Self Assessment

In this section, we quickly review what things lenders are looking for to approve your income, and things that might create problems. If you want to keep score, grab a piece of paper and a pencil and note the number of Probably OKs and how many Potential Problems. After this section, there are More Resources which you can explore further.

To perform the following self-review for Income, note how many Probably OKs and how many Potential Problems

Your income is Probably OK for a mortgage if...

• You have been at a permanent job with a guaranteed minimum hours/salary for more than 3 months and have some experience or training in your field.
• You have had the same income source for at least 2 years, even if the income/hours are not guaranteed.
• You have been self-employed for 2 years or more and can prove it.
• You make enough money to pay the new mortgage and your current payments.
• Your personal taxes are filed and paid.
• You have permanent disability or pension income.
• Any income coming from child tax benefits or from the ex- as alimony or child support payments represents 1/3rd or less of your total income.

# Probably OKs?______

There might be a Potential Problem with your income if...

• You are unemployed or not employed in Canada.
• You are on maternity leave without a guaranteed return-to-work date.
• You are on probation at your job (normally 3 months by law) or started a totally new career within last the 6-9 months (unrelated to past experience).
• You have had your current income source/job for less than two years and your hours / shift fluctuate and are not guaranteed.
• You have become self-employed within the last 2 years.
• You have a lot of personal debts relative to your income.
• You are not up-to-date on your personal income taxes or owe the government taxes.
• Your income benefit is subject to review/ non-permanent.
• You are separated / divorced and there is not yet a legal separation agreement

# Potential Problems?______

To qualify for a mortgage today you should have:

More Resources on Income & Debt

Income

Self-employed: income reporting and income tax considerations

Self-employed: how much income you claim dictates the size of your house and required down payment 

Self-employed: 2013 rule changes explained

Impact of unpaid personal income taxes

Employment documentation requirements for a CMHC-insured mortgage (needs updating)

More on income types and considerations to mortgage qualify

Mortgages for New Doctors and Medical Residents