Employment
Standards
Employment by
Others (Salary)
In general, employment and income should be confirmed
with a formal letter from the employer stating length and type of employment
(ie: as full time, part time, regular, probation, etc), and the amount of salary.
Lenders are also responsible for providing additional supporting documentation
such as current payroll stubs and applicant's annual tax returns or the tax
assessment receipts. To demonstrate the necessary stability of an applicant's
employment, borrowers should have been continuously employed by their current
employer for a minimum of one full year. Those applicants who may be on probation
or work under short-term contracts, are normally not considered salaried employees.
Please note: prior employment history should always corroborate an applicant's
current employment circumstances. 
Employed, Irregular Income
For qualifying purposes, fluctuating incomes such as
commissioned sales or short-term contracts are usually taken from the borrower's
historical income-producing patterns. A minimum basis of three years is considered
reasonable to estimate an accurate qualifying income average. Customary documentation
might include confirmation of commission agreement or employer contracts, plus
the personal tax returns (with annual assessment notices) for the past three
years. If a realistic income consistency cannot be confirmed from this sampling,
the reporting period may be extended beyond three years.
Self-employment Earnings
Self-employed applicants should be able to demonstrate
at least three full years of successful operation. This is to be verified through
an overall review of financial statements from the business and/or individual
income tax returns. When income tax returns are used to verify income, they should
also be supported by the official Notice of Assessment from Revenue Canada. The
borrower's income alone, or in combination with that of a co-applicant, must also
be considered as sufficient to cover the mortgage debt, property expenses and
external debt repayment, while leaving sufficient cash flow for typical day-to-day
living.
Eligible Income
Commuting Distance Concerns
If an applicant's location of their employment is not
within a normal commuting distance from the subject residential property, the
lender should assess the reasonableness of the mortgage loan, and must substantiate
the expected consistency for future income considering the physical distance
involved.
Overtime/Secondary
Employment
Income earned on an overtime bases should be included
only if it is clearly demonstrated that such income is considered typical, and
the amount of overtime is reasonable and expected to continue. The same holds
true for a secondary employment. Expectations should be confirmed from historical
documentation (prior tax returns, etc.).
Commission Income
Commission income may be included if it can be clearly
demonstrated that the level of income shown will be supportable in the future.
Generally, this would require a borrower to demonstrate that similar commissions
have been earned (and documented) for the past three or more years.
Bonus Incomes
Bonuses and/or profit-sharing allowances may be included
into income where it is verified at similar levels for the past three or more
years, and has the likelihood that these amounts will continue in the future.
Tips or Gratuities
Tips and/or gratuities may be included as income provided
that this form of income is consistent, and is declared as income through personal
tax returns with verification on tax assessment receipts for more than one year.
Legal Suite Rental
Income
In many cases, up to 50% of the documented rental income
(residence legal suite) may be added to an applicant's earned income for qualifying
purposes. There must be a reasonable expectation that this rental income will
continue.
Investment Income
Income from investments in securities, bonds and the
like, may be included if it can be demonstrated that similar income amounts
have been available for the past three years, and is reasonably expected to
continue. Should an investment income be considered as highly speculative, it
would not normally be included.
Alimony/Child
Support
Payments received for alimony and/or child support may
be included into income where it is demonstrated over time that such payments
have been fully and regularly made and are expected to continue on the same
regular basis. Also note: When an applicant is the person obligated to make
such alimony and/or support payments, the amount of those required payments
should be deducted from that designated income.
Social Assistance
/ Employment Insurance
Payments from social assistance and/or employment insurance
payment programs can only be included if those payments are demonstrated to
be a normally cyclical income pattern. (Past examples might have included professional
fishers in the Maritimes or loggers in BC.) These incomes should be confirmed
over the past three or more years, and applicants must show that such income
is reasonably expected to continue.
Gross Debt Service (GDS) Ratio
GDSR Introduction
The Gross Debt Service (GDS) ratio shows the
relationship between an applicant's expected shelter-servicing commitments,
and the qualifying income used. These commitments include the mortgage payment,
property taxes and heating costs (plus a portion of common/strata fees, if applicable).
[NB: Under the National Housing Act's Lender Guidelines for CMHC high-ratio
financing (ie: all mortgage loans over 80% loan-to-value), the standard maximum
qualifying GDS ratio is considered to be 32%.]
Secondary Financing
The repayment of any additional financing for which
the property may be presented as security must be included within the GDS ratio.
Strata / Condominium
Fees
If the application is for a mortgage loan over legal
strata-type or row-housing units, the GDS ratio will generally include an estimated
50% of the subject property's applicable common fees.
Total Debt Service (TDS) Ratio
TDSR Introduction
Since mortgage borrowers must also meet financial commitments
other than the cost of shelter, their financial capacity for the total repayment
obligations are also assessed. This is referred to as a Total Debt Service (TDS)
ratio and compares the carrying costs of shelter expenses plus all other existing
debt payments in relation to the applicant's income. [NB: Under the National
Housing Act's Lender Guidelines for CMHC high-ratio financing (ie: any down
payment or equity position less than 25% of property value), the standard maximum
qualifying TDS ratio is considered to be 40%.]
Down Payment Verification
Expectation of
Owner Equity
Lenders must ensure that a borrower is fulfilling the minimum down payment requirements from the applicant's own resources, and the lender should further verify this amount will be available at the time of closing. Down payment equity from "own resources" is interpreted to mean from… bona fide savings, an outright gift from immediate relatives, borrowing at arms-length from a third party, equity from the sale of another property, and/or duly contracted applicant labour. In addition to confirming the minimum equity requirements, the lender must also be satisfied that the borrower is able to cover expected closing costs. These may include, but are not limited to, legal fees, deposits, appraisal, any land transfer taxes and registration fees, etc.
Applicant's Savings
Lenders should attempt to obtain statements showing accumulation of the savings in an orderly and reasonable manner. Savings should be compared with borrower's income to ensure that they are reasonable. Declarations or affidavits from borrowers stating that the equity is from their own resources are not sufficient by themselves.
Sale of Another
Property
If down payment equity is to come from the sale of another property, verification of this equity must be obtained. The lender should confirm the previous property's selling value plus the outstanding balance of any existing financing on that property.
Sale of Stocks/RRSPs
If the down payment is to come from the sale of stocks or bonds, the lender must verify the fair market value of such assets.
Family Gifts
Outright gifts from immediate relatives are normally an acceptable source of down payment. Gifts are to be documented by a formal letter from the donor declaring the amount as a "true gift" and not a loan. Confirmation of resources should be obtained to affirm the gifted asset.
Borrowing Against
Assets
Applicants may separately borrow funds that can be used for down payment equity. Borrowed owner-equity may come from any “arms-length” source that is not tied to the property purchase or sale transaction. Such sources might include personal loans, lines of credit or credit cards, and/or lender cash-back incentives. However – all payments on such borrowed funds must be included in the applicant’s TDS calculation.
Sweat Equity
A lender must be satisfied that the applicant has the necessary skills and time available to perform, or has actually performed the work within an acceptable time frame. When there is a construction agreement with a builder, the sweat equity is to be clearly outlined and provided for in that agreement. Allowance for any form of sweat equity should not exceed 50% of the required minimum down payment.
Rent as Equity
Rent will only be accepted towards a down payment if it was acknowledged in a contractual agreement that includes the prepayment of equity on a monthly basis as part of an agreement to purchase. This option must involve only the monthly payment of an amount in excess of the market rent for that property. The original agreement should also contain some provision for a full (or partial) refund of that amount in the event that the prospective purchaser did not exercise this right to buy. The total amount of down payment to be credited to the borrower may not be more than the sum of those monthly payments that exceeded the fair market rental for that property.
Closing Costs
As a condition of approval, the lender must also verify that the borrower has additional resources available for the anticipated closing costs (no less than an amount equal to 1.5% of the purchase price).
Credit Worthiness
Credit History Report
A report on all borrowers must be obtained from an
independent credit-reporting agency, and provided in sufficient detail to adequately
confirm: - current address and borrower's identification information; - loan
and the loan repayment records; - historical credit repayment records including
a listing of recent inquiries. Each report should provide current file information
on credit received and current outstanding balances remaining. Recent enquiries
in these reports should be investigated to determine if additional credit was
granted that may not yet be reflected on that file. If any borrowers have been
known to use several names, nicknames, variations in spelling, birth names,
or previous spouses' names, credit reports should be obtained on all those variations.
Credit reports should always reflect at least three years of history. Where
a former bankruptcy record is disclosed, the applicant must have re-establish
the necessary credit management and stability of income to qualify for a high-ratio
insured loan. Such re-establishment could take upwards of two, three, or more
years from the date of discharge. It is also necessary to assess any residual
effects that bankruptcy may have on the applicant's future ability to repay.
Guarantors
Occasionally,
loan applications are received for which the applicant's current financial situation
is not considered sufficient to warrant an approval. When these instances exist,
a covenantal guarantee may be considered for qualification purposes. In all
such cases, a guarantor to the loan is likewise considered an applicant. A complete
assessment of the Guarantor's financial capacity is required.
Non-Residents
of Canada
CMHC Mortgage Insured Loans are only
available to permanent residents of Canada.
