Gross monthly income and mortgage debt servicing ratios question

[sclitheroe]

Question regarding how gross monthly income is calculated in terms of the debt servicing ratios that are involved in calculating mortgage affordability (and that are a requirement to be met for CMHC insurance)..Gross monthly is easy enough to calculate on its own, but what if you are also paid quarterly bonuses?

Will lenders look at a T4 from the previous year (or a couple years to establish history maybe) and just divide by 12, or is it strictly what you gross on your normal bi-weekly pay cheques?

[TurdFerguson]

I am not expert by any means but in my experience lenders are looking more at that T4 for the past 2 years as your representation of salaried income (primary driver in affordability). Pay stubs are more to show that you are still tracking towards T4 reported incomes, given the time gap you could be trending meaningfully higher or lower. Notice of assessment will be used for total income across all sources (dividends etc) that wouldn't be reflected on just your T4.

[ranchlandsselling]

Usually supplementary income can be applied at the average of the last 24 months (two tax years). NOA can usually be provided to show this.

[Travis Munroe]

^^ your both correct. I messaged the OP yesterday!

[Deegee]

I know personally, we (Credit Union) would like to see Tax Returns with the NOAs. I believe CMHC will be making this a requirement in the future (saw a memo sitting in my inbox that I haven't read in full detail yet).

Too often we are finding one time taxable items like RRSP withdrawals that are not reoccurring and overstate income, even when income is averaged out over two years.

[bizaro86]

I've had to provide my last two years of tax returns to verify rental income when applying for a new mortgage, I suspect this is/will become standard for anything outside of straight salary work.

[Sliver]

I know personally, we (Credit Union) would like to see Tax Returns with the NOAs. I believe CMHC will be making this a requirement in the future (saw a memo sitting in my inbox that I haven't read in full detail yet).

Too often we are finding one time taxable items like RRSP withdrawals that are not reoccurring and overstate income, even when income is averaged out over two years.

It is nucking futs people would want to overstate their annual income in order to buy a house they can't afford. Stupid.

[Deegee]

It is nucking futs people would want to overstate their annual income in order to buy a house they can't afford. Stupid.

People need better things to keep up with friends and family. Common sense goes right out the window.

If someone gets qualified for a $400,000 mortgage, when they go looking they will end up with a mortgage around $400,000. Sure they would be happy in a place that would leave them with $50,000 less debt, but I would suggest that rarely happens based off of what we see with people and what they are qualified for and their final purchase.

[Husky]

bonus each quarter...you somewhat of a sales person by chance? Either way my advice is if you need or rely on an arbitrary bonus each quarter to support affordability...your taking on too much debt risk.

[Husky]

People need better things to keep up with friends and family. Common sense goes right out the window.

If someone gets qualified for a $400,000 mortgage, when they go looking they will end up with a mortgage around $400,000. Sure they would be happy in a place that would leave them with $50,000 less debt, but I would suggest that rarely happens based off of what we see with people and what they are qualified for and their final purchase.

All depends where you are a in life. Many young professionals, accounting designations, engineers, etc salaries go up quickly yet the debt remains the same.But I agree people need to look at the bigger picture a bit more.

[ranchlandsselling]

bonus each quarter...you somewhat of a sales person by chance? Either way my advice is if you need or rely on an arbitrary bonus each quarter to support affordability...your taking on too much debt risk.

Arbitrary? How is a substantial part of someone's pay arbitrary? Maybe if it was rarely achieved or a one off, but plenty of people get paid that way because it's the structure they like or are given.

I almost took a job that had a starting $75k salary and bonus structure that over the last few years would have had it earning an additional 80-135% of the base salary. The whole job was pretty much based on that additional pay and if I had gone into the bank and wanted to qualify for a house needing $100k salary I would have been pretty damn pissed off if someone referred the major driver of my salary structure as being arbitrary.

The using RRSP withdrawals to make it look like income is higher seems stupid, but not bonuses.

Also get a little tired of the responsible borrowing rhetoric people throw around. People shouldn't do this, or that, etc. Why do people always worry about what everyone else is doing so much? Across Canada the arrears rate in mortgages as at April 2013 was 0.45%. Don't have time to find foreclosure statistics but that's 1 in every 222 people. Hardly an epidemic. In 2001 it was 0.63% and 0.65% in 1996.

[Bill Bumface]

Did they revise the CMHC mortgage affordability calculator? My current mortgage is dead on what they said I could afford when I was single and had one income (which was the case at the time). I'd say it was actually pretty accurate. Had I not had bonuses I would have had to be a bit cautious with money, but it's not like I would have been house poor or unable to go out or on vacation.

[ken0042]

Also get a little tired of the responsible borrowing rhetoric people throw around. People shouldn't do this, or that, etc. Why do people always worry about what everyone else is doing so much?

Agreed. I think it is actually more irresponsible to buy a lesser house than what you will need for your growing family. If a young couple buys a 2 BR condo; and they are planning on having kids, that means in a couple of years they will be selling and buying again. Pretty much burning $20K just in moving and realtor costs.

When I bought my house it was quite big for a single guy, but now with a familly it is actually slightly on the small side. However it is still manageable.

I guess it just bugs me that people seem to think you have to move every X number of years. A friend at work is building her house, and it's almost done and she was showing pictures. She really loves her new house; and she just beams when she talks about it. However there was somebody talking about the granite in the kitchen and the hardwood floors saying "Good choice- those will be great for resale value." Instead of "What great colours, you must be excited to move in."

[Deegee]

Just to clarify, my comment was directed at the majority of people who generally spend outside their means. I would politely suggest that most of Calgary Puck does not act like most of the general public.

I guess there is a little bias in my comments because in my industry (banking) we see a lot of people who have over extended themselves, regardless or what guidelines say.

[bizaro86]

Agreed. I think it is actually more irresponsible to buy a lesser house than what you will need for your growing family. If a young couple buys a 2 BR condo; and they are planning on having kids, that means in a couple of years they will be selling and buying again. Pretty much burning $20K just in moving and realtor costs.

When I bought my house it was quite big for a single guy, but now with a familly it is actually slightly on the small side. However it is still manageable.

I guess it just bugs me that people seem to think you have to move every X number of years. A friend at work is building her house, and it's almost done and she was showing pictures. She really loves her new house; and she just beams when she talks about it. However there was somebody talking about the granite in the kitchen and the hardwood floors saying "Good choice- those will be great for resale value." Instead of "What great colours, you must be excited to move in."

Yeah, we got that a lot when my wife and I bought a decent sized house. It's not nearly a McMansion or anything, but it is more house than two people need. On the other hand, we're planning on having kids, so should we have bought a condo, then a townhouse, then a house with a yard and moved 2 or 3 times?

I had relatives telling me we should take in foreign students as boarders, or operate a B&B part time, and all sorts of other weird ideas. The house was close to what we could qualify for then, but is comfortable now (5 years later), and wouldn't be an issue even on my salary only. It's amazing how people feel the need to explain in great detail what you're doing wrong with your housing.