Income, Debt & Mortgage Qualification

"To get a mortgage, you have to prove that your income is reliable and sufficient enough to pay for your new mortgage as well as your existing debts"

Debt and Income Mortgage Qualification for Canadians

To mortgage-qualify in Canada, for the most part, you have to prove you reliably make "sufficient income 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.

What is Classified as Income for Qualifying Purposes?
About Debt and Debt-Servicing-Ratios
Self-Assessment - Is Your Income Okay?
More Resources on Income & Debt
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 at least one year in the same line of work and that the current job is not probationary or temporary.

Irregular Income such as non-guaranteed hours, overtime, seasonal income, bonuses, tip income that is claimed on your taxes, commissioned sales or short-term contracts are usually acceptable, but you will likely be required to demonstrate sustainability by providing at least a two-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 approximately 1/3rd of your total income mix (varies by lender). Canada Child Benefits are acceptable as income for most traditional lenders these days for kids under 15.

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.

Table of Contents

More Resources on Income

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%).

Debts	Couple 1 Payments	Couple 2 Payments
Car	$ 500/mo	$ 500/mo
Truck	$ 0	$1000
Trailer	$ 0	$ 250
Car (co-sign for son)	$ 0	$ 400
Credit Cards	$ 300 (3% x $10K bal)	$ 600 (3% x $20K bal)
Line of Credit	$ 0	$ 300 (3% x $10K bal)
Student Loans	$ 200	$ 0
TOTAL	$1000	$3050
TDS Max @44%	$4400	$4400
Available for House	$3400/mo	$1350/mo

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 $425K 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, which would equate to a home purchase mortgage of ~$160K, which will not get you much in an urban area.

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.

Table of Contents

More Resources on Income

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 become employed by a related/family member in 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 2 or more OKs, and no potential problems