A pay stub is a crucial document when applying for a mortgage in Ontario because it provides lenders with verified proof of an applicant’s income and employment status. Without a verifiable pay stub, it can be impossible to support an applicant’s mortgage application to prime lenders, such as monoline lenders or banks, and extremely difficult to support a mortgage application to alternative lenders and private mortgage providers.
A paystub, also known as a payslip or earnings statement, includes various information detailing an employee’s earnings, deductions, and other relevant financial details for a specific pay period.
Mortgage agents review and compare the information on an earnings statement with T4s and Letter of Employment to ensure accuracy when underwriting mortgages.
The following reasons are why a pay stub is crucial:
Verification of Other Income Sources
Income Verification
Proof of Employment: A pay stub confirms that the applicant is actively employed and earning a steady income. This is vital for determining the borrower’s ability to repay the mortgage.
Income Amount: It provides details of the applicant’s gross and net income, allowing the lender to assess whether the applicant’s income meets the mortgage qualification criteria.
Commissions and Bonuses: If the applicant earns income from commissions or bonuses, the pay stub will show this. Lenders typically look at variable income like commissions or bonuses over a 2-3 year period to establish consistency before including them in qualifying income.
Also See:
Applying with Disability Income
Mortgages: Including Support Payments to Income
Debt Service Ratios
Lenders in Ontario use two key debt service ratios to determine how much mortgage you can afford:
- Gross Debt Service Ratio (GDS): The percentage of your income that goes toward housing costs, including mortgage payments, property taxes, and heating.
- Total Debt Service Ratio (TDS): The percentage of your income that goes toward all debt payments, including housing and other liabilities like car loans or credit cards.
The pay stub provides the income necessary to calculate these ratios and determine whether the applicant can afford the mortgage payments.
Also See: Calculating Debt Service Ratios
Tax Deductions and Benefits
Your paystub demonstrates the stability of your income, and details benefits you are entitled to and allowances that may enhance your mortgage application:
- Income Stability: Pay stubs show deductions such as Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income taxes. These deductions help the lender assess the applicant’s income stability and net earnings after mandatory deductions.
- Benefits and Allowances: Pay stubs often list non-taxable income like allowances or employer-paid benefits. Lenders may consider some of these items, such as car allowances or housing benefits, as part of the applicant’s income for qualification purposes.
Also See:
Mortgage Term: Earnings Statement
Verification of Other Income Sources
Employees not only have wages or a salary but may also be compensated for additional work they do or performance. It is also important to demonstrate how consistent those other earnings are.
- Overtime, Commissions, and Bonuses: If the applicant earns from multiple sources (e.g., regular salary, overtime, bonuses), the pay stub will show these additional earnings. Lenders may require pay stubs over a period (e.g., three months) to verify that variable income sources are consistent enough to include in the mortgage qualification.
- Year-to-Date Totals (YTD): YTD income can help lenders verify consistency in earnings over the year, especially when using fluctuating income like commissions.
Employment Type
People work in many different ways today. Some examples of employment types include permanent full-time or part-time, temporary full-time or part-time, contract, probational, or seasonal.
- Full-Time vs. Part-Time: Pay stubs clarify the type of employment (full-time, part-time, or contractual), which affects how the lender views income stability. Full-time employment with a stable income is generally seen as lower risk than part-time or contract work.
- Seasonal Work: If an applicant works seasonally, the pay stub will show the income over the period, helping the lender assess whether the borrower’s income is stable enough to qualify for a mortgage.
Establishing Creditworthiness
Consistent and verifiable income, as shown on the pay stub, helps support an applicant’s creditworthiness. Lenders want assurance that the borrower can meet monthly mortgage payments over the long term.
See Also: Credit Score and Your Mortgage
Down Payment Source
If the applicant is using part of their salary or bonuses for the down payment, recent pay stubs can show the accumulation of savings. Some lenders may ask for documentation to confirm the down payment source is legitimate and not borrowed.
Also See: Get Down Payment Help Through Ourboro
Supporting Documents
Pay stubs are often requested alongside other documents, such as Notice of Assessment (NOA) from the Canada Revenue Agency (CRA), T4 slips, or bank statements, to further confirm the accuracy of income reported.
Also See: Mortgage Document Frustration
Self-Employed Applicants
While self-employed individuals do not typically receive pay stubs, they may need to provide additional documentation like business financials or tax returns to prove income. For salaried employees, however, the pay stub is one of the most straightforward ways to verify income.
Also see: Understanding Stated Income Business Income
Summary
Pay stubs provide a transparent and comprehensive picture of an applicant’s financial situation, including income stability, employment status, and deductions. This helps lenders assess whether the applicant can comfortably manage mortgage payments while covering other living expenses and debts. Therefore, they play a key role in the mortgage application process in Ontario.
