How Mortgage Lenders Verify Income for Your Loan

Mortgage lenders require strict income verification to ensure you can afford to make the monthly payments. This process involves a variety of documentation and methods designed to provide lenders with a comprehensive picture of your financial situation. Below, we will explore the specific steps and documents required for different employment scenarios and additional income sources.

What Documents Do Mortgage Lenders Require?

Mortgage lenders typically request income documentation that includes your pay stubs, W-2 forms, and 1099 forms. These documents provide a clear view of your monthly or annual income. Additionally, for direct deposit accounts, bank statements are requested to confirm consistent and reliable income.

Step-by-Step Verification Process

Salaried Employees

Mortgage lenders may ask for your employment letter and recent pay stubs. Typically, they will also require your most recent two years of tax returns. This information helps confirm your steady income and ability to repay the mortgage.

Commission Income Employees

Employees who earn commission-based income may need to provide the same documentation as salaried employees, as well as their T1 General forms for the past two years, which include the corresponding Notice of Assessment (NOA). This document shows the average income over the past two years, providing a more accurate picture of your earnings.

Self-employed: Incorporated

For self-employed individuals who operate under a business name, mortgage lenders will request a current T1 General form, a confirmation of no tax owing, official company financials, and supporting bank statements. Additionally, a current corporate search is essential to confirm your business ownership.

Self-employed: Sole Proprietor

Self-employed individuals as sole proprietors need to provide a current T1 General form, a confirmation of no tax owing, and your business license, trade license, or GST registration/returns to prove business ownership. This information is crucial for verifying your income and financial standing.

Additional Income Sources

While the primary sources of income should be adequate, additional income sources can bolster your mortgage application. These include:

Canada Child Benefit (CCB): Additional financial support for families with children. Alimony/child support: Income from legal agreements that provide support for children. Government and/or private pension: Regular payments from government or private pension plans. Rental property income: Income generated from leasing out real estate properties. EI benefit for maternity leave: Emergency income provided during maternity leave periods.

The Role of Banks in Verifying Income

While banks may be involved in the process, particularly in verifying paystubs and direct deposits, the primary responsibility lies with the mortgage lenders. However, some lenders may contact your employer to validate the information provided through payroll or other means.

How Banks Verify Income for a Mortgage

Typically, banks require an applicant’s two most recent years of payroll stubs. This process ensures that the income documentation is accurate and up-to-date. During the application process, mortgage lenders will review these documents to confirm the applicant’s ability to repay the mortgage.

Through a combination of strict documentation requirements and thorough verification processes, mortgage lenders can confidently assess your financial stability and determine the best terms for your loan.