Meeting the Employment and Credit Criteria to Qualify for a Mortgage

Vancouver home buyers who wish to qualify for a mortgage must first meet the employment and credit requirements of the lender. As part of the mortgage underwriting process, lenders prefer to grant credit to borrowers who have stable income and a good credit history. The down payment and property characteristics make up other factors that lenders consider when processing a mortgage application.

Verification of Employment

Most Vancouver home buyers’ sources of income come from employment or self-employment. Besides verifying the borrower’s employment status, a mortgage lender considers your current income as well as your outlook for ongoing employment.

The lender will need a “Letter of Employment” (LOE). Your employer must submit the LOE on company letterhead, date and sign the document, and include the signatory’s contact information. Generally, the LOE contains information such as employment status, whether salary or hourly, and number of guaranteed work hours per week.

In addition, lenders may require Vancouver home buyers to submit any of the following documents:

• Recent pay stubs
• Notice of Assessment from the last two years
• T4, T4A, or Commission Earnings Tax Form
• Income Tax Returns, T1 General Tax Form
• Bank Statements

Your bank or mortgage broker will tell you what documents you need to present along with your mortgage application. The requirements differ among lenders.

Income Sources Accepted by Lenders

Lenders accept a wide variety of income sources when evaluating mortgage applications. If you have permanent, full-time employment, make sure you have completed the probation period and have at least three years of unbroken job history. Permanent, part-time employees need to have at least two years on the job and three years’ continuous job history.

The most common types of income include wages, salaries, overtime, bonuses, commissions, and profit sharing. Lenders also consider secondary employment income if you have completed probation. Other types of income accepted by lenders include:

• Investment income
• Pension income
• Disability income
• Percentage of rental income
• Maternity leave payments
• Child support and alimony payments

Salaried or hourly employees must submit the last two years’ T4 slips. The mortgage broker and lender verify income. Mortgage lenders want to ensure, at least at the time of the application process, that the borrower has a high probability of making the monthly mortgage payments in the future.

Self-employed Vancouverites can expect the lender to request copies of the last two years of Notice of Assessments (NOA), and other documentation proving income, depending on the underwriting requirements.

What Information Does Your Credit Report Contain?

Canada’s two major credit-reporting agencies, Equifax and TransUnion, compile information from creditors regarding the payment records of consumers granted credit. The credit-reporting agencies package this information into credit reports. Credit reports summarize an individual’s credit history.

When a person signs off on the documents for a personal loan, credit card, or other request for credit, most lenders conduct a check on the applicant’s credit history. The credit history helps the lender determine the borrower’s ability to repay the loan.

The Business Practices and Consumer Protection Act covers credit information, what companies can include in reports, how third parties use the information, and your rights. Credit reporting agencies can only release your information to creditors or other organizations to which you have granted permission. This may include banks and mortgage brokers, credit card companies, car leasing firms, house or apartment rental businesses, or other lenders. It also applies to applications for insurance or employment.

Obtain a Copy of Your Credit Report

Start this aspect of the home-buying process long before you are ready to apply for a home mortgage. Obtain a free copy of your credit report. Obtain your credit score. The company may charge a fee for the score. When you receive the credit report, go over the information carefully. Sometimes, credit reports contain false or inaccurate information.

Check the following information on your report:

• Name
• Address
• Outstanding balance
• Account numbers
• Negative information: late payments, collections, write-offs
• Inaccurate or outdated information

Correct inaccurate or outdated information contained in the report by sending a letter to the credit reporting agency that disputes the erroneous information. The company must respond to the inquiry within 30 days.

If the report contains inaccurate or outdated information, send a letter to the credit bureau disputing the information. The credit bureaus may not have the same information in their records.

The following are links and phone numbers for the two credit bureaus:

Equifax Canada, 1-800-465-7166

Trans Union of Canada, 1-800-663-9980

Your Credit Score

FICO is an acronym for the Fair Isaac Company. This company owns the proprietary software used to calculate consumer credit scores, based on information contained in consumers’ credit files. Creditors use the credit score to determine how much mortgage or other credit they can lend, the interest rate, loan periods, and other associated costs. Equifax calls its credit score the “Beamon” score.

The two credit reporting agencies use a scale of 300 to 900. Vancouver home buyers with high credit scores may qualify for the best interest rate and mortgage terms. Lenders regard consumers at the high end of the scale as less risky. Consumers at the lower end may receive credit from lenders, but at a higher interest rate. Most lenders prefer a credit score of 680 or higher.

Generally, credit reporting agencies use the following factors and weighs to determine your credit score:

1. Payment history — 35%
2. Amount owed — 30%
3. Length of time in file — 15%
4. New credit — 10%
5. Type of credit — 10%

Some banks also have their own methods for determining a borrower’s credit score. However, most lenders rely on FICO. Information in credit reports changes frequently and requires the continual recalculation of credit scores.

How Your Credit Score Affects Interest Rates and Payments

The following table is only a guide, but it shows how your credit score influences the interest rate you receive and your mortgage payment. A high credit score results in a lower interest rate. Conversely, a low credit score means a higher interest rate. The figures are based on a $250,000 mortgage.

Credit Score Interest Rate Month Payment

760 – 850 3.80 $1.160.67
700 – 759 4.022 $1,191.91
660 – 699 4.306 $1,232.47
620 – 659 5.116 $1,351.79
580 – 619 7.670 $1,756.64
500 – 579 8.529 $1,901.29
Source: FICO

Tips on Raising Your Credit Score before Applying for a Mortgage

1. Pay all bills on time because they affect your credit score the most. If it helps, use your bank’s online account management software to schedule bill payment reminders. These will send you a text or email. Another approach is to have automated bill payments. The creditor debits your chequing account and ensures payment of your bills on time. In British Columbia, a late payment can stay on your record for six years.
2. If you do not have credit, apply for a credit card. It is not necessary to carry a balance on the credit card. Using one or two credit cards to make purchases will help raise your credit score. If you do not qualify for an unsecured credit card, apply for a secured card. The card issuer requires the applicant to open a savings account in the same amount as the line of credit. Verify that the card issuer reports cardholders’ payment information to Equifax and TransUnion.
3. Another method of building your credit score involves applying for one or two instalment credit accounts, like a personal or student loan. An automobile loan also qualifies.
4. If you have missed payments, bring them current. Paying the bill on time moving forward helps raise your credit score. Over time, the good payment history outweighs negative data.
5. A collection account stays on the credit record for six years, even if you pay it. Before making the payment, try to negotiate a favourable payment rating with the creditor.
6. Too many consumer accounts lower your credit score and make lenders uneasy. Lenders fear that an overextended borrower could have problems repaying the mortgage at some point in the future. Consider closing some accounts or reducing the credit limit on some credit cards. Do not close older accounts, which can also lower the credit score.
7. Develop a plan of action and a budget to reduce account balances or pay off certain debts. Start by listing your accounts in descending order on a piece of paper. Start with the credit cards with the highest carrying charge. Pay as much as you can afford on the card each month, until you reduce the debt according to plan. Make minimum monthly payments on the other credit cards. Avoid using the credit cards. Start paying with cash, cheque, or debit card.
8. Eliminate or limit “hard inquiry” checks on your credit. This comes from creditors checking your profile to extend credit. This raises a “red” flag for mortgage lenders.

Visit the Financial Consumer Agency of Canada for a good source of information about credit report, credit scores, and other consumer related information.