Many Canadian homeowners plan to use rental income to boost their mortgage eligibility. But lenders don’t always accept that income, and when they don’t, it can derail your entire approval.
The truth is, not all rental income is treated equally. From documentation gaps to property types, lenders apply strict rules to determine how much, if any, of your rental earnings actually count.
Why Lenders Disregard Rental Income
Mortgage lenders don’t automatically accept rental income because they want to assess the reliability, consistency, and legality of those funds. If the income seems unstable, undocumented, or outside their risk threshold, they’ll reduce or exclude it from your qualifying income.
This can drastically lower the mortgage amount you’re approved for — even if your cash flow looks fine on paper.
1. The Income Isn’t Declared on Your Taxes
This is the most common reason rental income is rejected. If you haven’t declared your rental income on your last two years of tax returns, lenders will assume it’s informal or inconsistent. Verbal claims or bank transfers aren’t enough.
How to fix it: Always report rental income on your T776 (Statement of Real Estate Rentals) when filing your taxes. This legitimizes your income and provides proof of history.
2. The Property Is Not Legal or Zoned for Rentals
If your rental unit is part of an unzoned or illegal suite — for example, a basement apartment without permits — lenders may not recognize income from it. Some may consider a portion of it with restrictions, but many will exclude it entirely.
How to fix it: Ensure secondary suites meet local bylaws and zoning rules. Legal conversions and municipal approvals go a long way in making rental income count.
3. You Don’t Have a Signed Lease or Rental Agreement
Without a lease in place, lenders have no way to verify your rental terms or duration. Month-to-month or cash arrangements can seem risky and unverified, even if consistent.
How to fix it: Always use a formal, signed lease agreement. Include start date, rent amount, and tenant name. If you have multiple units, provide separate leases for each.
4. The Lender Uses a Conservative Calculation Method
Even when rental income is accepted, lenders apply different formulas. Some only use 50% of your rental income to account for vacancies and expenses. Others apply a “rental offset” or “add-back” method that affects how much shows up in your total qualifying income.
How to fix it: Work with a broker who understands which lenders offer the best treatment for rental income. Some lenders will use 80% to 100% of your gross rent if you have strong documentation.
5. You’re a First-Time Landlord Without History
If you’re buying a property and plan to rent out a unit for the first time, some lenders may not accept projected rental income unless you have a signed lease and a market rent letter from an appraiser. Even then, approval isn’t guaranteed without prior rental experience.
How to fix it: Get a detailed rental market appraisal with projected income. Secure a lease before closing if possible. Some lenders specialize in investor-friendly underwriting.
What to Do If Your Rental Income Is Being Ignored
If your lender isn’t counting your rental income, you still have options:
- Gather Stronger Documentation: Tax returns, leases, and market rent appraisals all help strengthen your case.
- Explore Alternative Lenders: Some B-lenders or credit unions are more rental-income friendly, especially for new investors.
- Adjust Your Strategy: Consider a lower loan amount, a larger down payment, or a co-signer to bridge the gap.
Conclusion
Not all rental income will help you qualify for a mortgage, especially if it’s undocumented, irregular, or tied to an unapproved unit. But with the right preparation and lender strategy, you can often get partial or full credit where it counts.
If you’re trying to qualify using rental income, Pradip Maheshvari can help structure your mortgage with lenders who understand investment properties and rental-based income.
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