Lender Required Documents
When informing the lender of your income they will want to know:
- How much you earn and how it is calculated (salary, hourly, commission, etc.)
- How long you’ve been with your current employer or running your own business
- How many years you’ve worked in that industry
Employed: Job letter, T4s from the previous 2 years, previous year’s notice of assessment
Sole proprietorship or partnership: T1 generals from the previous 2 years with the statement of business activities and corresponding notice of assessments, and 6 months’ bank statements
Incorporated: T1 generals from the previous 2 years, audited financial statements, T2 Corporate income tax returns and notice of assessments; articles of incorporation
Rent: Current leases and at least 1 of the following: rent rolls, 6 months account statements showing rental deposits or previous year’s T1 general
Down Payment Sources
Unlike purchasing a home you plan to live in, an investment property requires a minimum down payment of 20%. Down payment for investment properties must also come from your own sources; gifted down payments* are not permitted.
*Gifted down payments – the down payments are donated by a friend or family member and they can prove they have a standing relationship with you.
Sources Of Down Payment
- Borrowed down payment (ie. Mortgage refinance, home equity line of credit (HELOC) or reverse mortgage)
- Reverse mortgage
- Joint venture partners*
*Joint venture partners offer the opportunity to purchase an investment property with other people’s money. Becoming a real estate expert may allow you to leverage your knowledge to invest other people’s money and share in the returns!
A joint venture in real estate is two or more parties that combine resources for a specific development or investment. The parties in a joint venture maintain their own business identity while working together to complete a deal.
The responsibilities in a joint venture can be assigned in whatever way is needed for the particular project. The profits are also shared however the parties agree.
Assets & Liabilities
When applying for a mortgage, all mortgage lenders will require a breakdown of your net worth. Net worth is made up of assets and liabilities or everything you own and everything you owe.
Everything you own including properties, investments, savings, vehicles etc. If you have a significant art or jewelry collection, this may also be included in the asset portion of your application.
Everything you owe, including mortgages, personal loans, lines of credit, car leases etc. In addition to what and how much you owe, lenders will want to know how much your payments are and the frequency they are to be paid (weekly, bi-weekly, monthly). This will help calculate the ratio of your total liabilities to your income which will be required to determine your ability to repay your mortgage.
Including a detailed breakdown of your current net worth in your investment binder and keeping it up to date will help ensure a smooth transaction. For savings, investments and other liquid assets, be sure to include a recent account statement to prove the funds exist and belong to you.
As in any lending decision, your credit will be a large deciding factor. Credit is a measure of risk and is based upon your ability to handle debt in the past. The higher your credit score, the lower your risk of default, which will increase the likelihood of approval and give you access to the most beneficial mortgage options available.
Credit is based on 5 factors:
- Payment History 35%: Making payments on time has the largest positive effect on your credit.
- Credit Utilization 30%: Keeping your balances below 30% of your limits has a net positive effect on your credit score.
- Types of Credit 15%: What kinds of debt you hold (car loan, credit card, line of credit…) and whether it is a single type or diversified.
- Length of history 15%: Your credit score will increase the longer you have established credit. If you have established credit for less than 2 years, you will find it harder to qualify for a mortgage at certain lenders.
- Credit Checks 5%: Making up a small portion of your score, the number of times you have your credit checked by a debt provider can negatively impact your score if you frequently look for different types of financing.
Regularly checking your credit can help ensure accurate reporting and help you spot any inaccuracies. Keeping an up-to-date report in your investment binder will help us preliminary assess your borrowing capacity without making a ‘hard check’ of your credit.
Net Worth Calculation Template
To get a better understanding of your financial situation before purchasing your next investment property, feel free to reach out and book an appointment with me today!