Here is the situation: A single woman wants to move from Ontario to Alberta. She has saved $150,000, has a good credit score, and wants to buy a 4-bedroom, 3-bathroom, 1600 sq ft bungalow in Edmonton that presently goes for $500,000. She needs a $350,000 mortgage. The woman has quit her job in Ontario and has received an offer of employment letter to start a new job in Edmonton next month that pays reasonably well. What challenges will she have when it comes to getting a mortgage?
Employment Status
Her first challenge to getting a mortgage is her employment status.
Many lenders hesitate to approve a mortgage for individuals in their probationary period (often the first 3-6 months of a new job), as employment is not guaranteed until after this period.
She has received an offer of employment letter, but this is not what lenders are looking for. Lenders all want to see a proper Letter of Employment which formally:
- Confirms employment
- Defines the company details
- Outlines a person’s employment status (full-time, part-time, permanent, temporary, seasonal, salary, hourly, guaranteed hourly, contract)
- Provides income details (salary or wage, payment frequency, guaranteed or variable)
- Provides details of commissions, bonuses, and allowances
- Explicitly defines probationary period
- Contains a statement confirming that the individual is actively employed and not on leave
- Contains employer’s name, title, contact information and authorized signatory
- The letter must be dated and should not be older than 30-60 days at the time of submission to the lender.
A Letter of Employment may also contain a statement about the employee’s job security or anticipated tenure, which can strengthen the letter.
For a Letter of Employment to be acceptable to lenders, it must include all the required elements to ensure clarity, authenticity, and compliance with verification standards.
Income Verification
The second challenge for this woman is that she cannot at this time verify her income.
Mortgage lenders typically require stable and verifiable income to approve a loan. Since he has no income at the moment (because she has quit her job in Ontario) and has not started earning from the new job, this could pose a significant barrier.
While she may be able to receive a Letter of Employment from her new employer before she starts work, a Letter of Employment by itself is of little value to lenders without an accompanying pay stub.
A pay stub (pay slip) not only verifies that the woman has started to work for her new employer, but it is also essential to lenders because in underwriting a mortgage they cross-reference the information on the Letter of Employment with the information on the pay stub. A proper pay stub provides transparent information about an employee’s earnings, deductions, and net pay. It is a critical document for lenders, as it verifies employment income and consistency.
Further, without a current income, the lender cannot accurately calculate the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, which are crucial in determining mortgage affordability.
Solutions
A person in this situation has the following solutions available to them:
- Rent first
- Private Mortgage
Rent first
The first solution for the woman is to find a short-term rental; perhaps a hotel room with suites or an Airbnb. Just someplace to stay long enough to get that Letter of Employment and first pay stub.
If she has been working in the same industry for a given period of time in a similar role, many lenders will not hold it against her that she is starting a new job and is on probation. Some lenders want it disclosed formally in the LOE, but there are lenders who will give her a mortgage despite being on probation.
Once she has the Letter of Employment and first pay stub, employment status and income verification will be satisfied, and obtaining a mortgage will be much easier.
Private Mortgage
Another solution is to get a private mortgage. A private lender might provide her with a mortgage in the scenario described, but it would depend on several factors, including the strength of her overall financial profile and the property itself. Private lenders are typically more flexible than traditional A-lenders and B-lenders, as they focus less on income verification and more on the equity in the property, the borrower’s credit score, and the exit strategy.
Private lenders often require a significant down payment (typically 25%-35% of the property’s value). The woman above has 30% down payment, which would satisfy a private lender.
READ MORE: Alternative vs Prime Lenders
While private lenders are more forgiving of credit issues, a reasonable credit score (typically above 600) can improve the man’s chances of approval. The woman has a good credit score (above 680).
Private lenders place heavy emphasis on the value and marketability of the property being purchased. A property in a desirable Ontario location, such as the Greater Toronto Area, or Edmonton in this case, would make them more likely to approve the mortgage.
The woman clearly has an exit strategy. She will start her new job in an industry she has experience in that pays reasonably well.
Summary
While relocating from Ontario to Alberta and purchasing a new home poses challenges, such as meeting employment and income verification requirements, these obstacles can be managed with strategic planning. Renting temporarily until she starts her new job and obtains the necessary documents, including a Letter of Employment and pay stub, is the most straightforward solution for this woman. Alternatively, she could explore a private mortgage, leveraging her strong financial profile, substantial down payment, and good credit score. With either approach, addressing lender requirements and establishing financial stability will enable her to successfully transition to homeownership in Alberta.
