It never ceases to amaze me how many people I ask how much they make (gross income) and they answer me with a blank stare and respond: “I really don’t know.” They know how much their take home is (because let’s be honest in many ways that is what is important, that’s what we get to spend) but they have no idea what their actual income is.
What people don’t realize is, your income is what sets your tax bracket and what starts to set the stage for how much of a home you can afford (qualify) or what your minimum down payment is going to be. Let’s talk about income,what it means to you, what it means to a mortgage and what it means to your mortgage qualification.
Hourly – Where you are paid by the hour. You are only paid for the hours worked and there is no guarantee of a set amount of work. Most lenders require at least a two-year history of this type of income at the same employer as it is not guaranteed. Plus there is a risk that borrowers may not get the income required to pay the mortgage payment.
Guaranteed Hourly – You are paid by the hour and guaranteed a fixed number of hours each week, rotation, month ect. This means employees receive a relatively stable income. However, although your employer offers these hours, should you choose not to work you will not be paid.. So if you are lucky enough to have guaranteed hours and are considering purchasing a home, it is best not to take time off without pay.. This would mean that even though your letter of employment is going to tell a mortgage broker you get guaranteed hours, your paystub will raise questions and imply you are in fact on an hourly contract rather than guaranteed hourly.
Salary – You are lucky enough to be guaranteed the same wage each pay period, likely no matter the hours worked. You may have sick days or flex days to cover the time you can’t be at the employer for things like doctors’ appointments, the kids’ first day of school ect. Employers may even let you work flexibly and bank time if you have to work more than the agreed 40 hours/week. For a lender this is perfect. It is simple and straight forward as long as your paystubs confirm the same wage each pay period.
Salary plus Commission – This type of income gives a person that little bit of security with a little bit of risk to earn more for their work. It is the same as a salaried position with a guaranteed wage each pay period but employees also get extra income for reaching sales or work targets. The salary can be used immediately towards qualifying for a home, however, the commission portion of your wage packet usually requires a two-year history. If commission is a big part of your income, you will need to be at your employer for at least two years before expecting to purchase a home.
Commission – This income is not guaranteed. You only get paid based on a portion of what you earn for your employer. For some this can be very lucrative but definitely not for the faint at heart as the income can have highs and lows. As with salary plus commission incomes, the lender will likely require a two-year notice of assessment average.
Business For Self – This income is for those who are self-employed. They have taken the risk to open their own ventures and rely on their steam, knowledge and sometimes willpower to earn a living. Business owners are fully responsible for their income and collecting it. They have multiple write offs and often use those to pay as little tax as possible. These people are in a category of their own and really require a blog of their own as they are many different ways and programs to help with their purchase.
So now that you know so much about incomes and you are questioning where you fit, I suggest you call your favourite Dominion Lending Centres Mortgage Associate to start the process of pre-evaluation!