When applying for a mortgage, lenders require a comprehensive picture of your financial situation to assess your ability to repay the loan. One important document in this process is a letter of employment. This letter serves as a testament to your employment status, income stability, and long-term financial security. Understanding why it’s needed and what should be included in the letter will streamline the process for you.
Why is an Employment Letter for Mortgage Financing required?
1. Proof of Employment
A letter of employment for mortgage confirms that you are currently employed and provides assurance to the lender that you have a steady source of income. Lenders are more inclined to finance borrowers who have stable and reliable employment, however even casual and part time employment can be considered, pending you have a two year history or some guaranteed hours.
2. Verification of Income
This letter helps lenders verify the income you’ve declared on your mortgage application. It provides a detailed account of your salary or hourly wage and guaranteed hours per week. If you work overtime or get bonuses, a two year average of income can be used to help you qualify for a higher mortgage amount. Your most recent T4’s will be requested if you want to use additional income than what is written on your letter of employment.
3. Determination of Loan Affordability
By confirming your employment and income, lenders can assess your debt-to-income ratio, a critical factor in determining how much you can afford to borrow. A healthy ratio suggests that you’re more likely to manage monthly mortgage payments effectively.
4. Risk Mitigation
Lenders use the letter of employment to gauge the risk of lending to you. Stable, long-term employment suggests lower risk and helps to strengthen your mortgage application.
What to Include in the Letter of Employment?
For a letter of employment to fulfill its purpose in the mortgage application process, it must contain specific information:
1. Your Full Name and Employment Status
The letter should clearly state your full name and confirm that you are currently employed with the company.
2. Date of Employment
Including the start date of your employment helps lenders understand the length and stability of your employment history.
3. Position and Nature of Employment
It should detail your job title and whether you’re employed in a part-time, full-time, or contract capacity. The nature of your employment can affect income stability, which is a factor in the lending decision.
4. Salary Information
A crucial element of the letter is your salary information, including your base salary and any additional income like bonuses or overtime. This information helps lenders calculate your income accurately.
5. Employer Contact Information
Lenders will likely contact your employer for verification purposes. The letter should include the employer’s contact details, such as a phone number or email address and they should expect a phone call to verbally confirm the details on the letter. With fraud on the rise in Canada, lenders are more likely to call than not.
6. Employer’s Signature
To verify its authenticity, the letter should be signed by a human resources representative or your direct supervisor.
7. Company Letterhead
Ideally, the letter should be printed on the company’s letterhead to provide additional verification of its legitimacy.
Example letter of employment for your mortgage application
A letter of employment is an essential document in the mortgage pre-approval and approval process, offering lenders a clear view of your employment and income stability. Providing a detailed and accurate letter can expedite the mortgage approval process, bringing you one step closer to securing your dream home. When preparing your letter of employment, ensure it includes all necessary information to avoid any delays or issues with your mortgage application.
The letter of employment does not need to include your duties or include anymore than the facts listed above. Your position, start date, salary / hourly rate and guaranteed hours per week – signed and dated.
