Why do lenders want two years of Notices of Assessment?

In Canada, lenders ask for two years of Notices of Assessment because the notices show income the Canada Revenue Agency has processed. The notices also show whether that income is stable and whether you owe any tax. Two years is the usual minimum that lets a lender see a trend rather than a single year that might not repeat.

What a Notice of Assessment is

A Notice of Assessment (NOA) is the summary the Canada Revenue Agency sends after it processes your income tax return. The NOA shows your total income, the tax assessed, and any balance owing or refund. You can download NOAs from your CRA online account.

A lender uses the NOA as independent confirmation. A tax return is something you prepared; the NOA shows what the government accepted.

Why lenders ask for two years

Lenders lend over long periods and need to be confident the income will continue. One year might be unusually good or bad. Two years lets the lender:

• See a trend. Rising, steady or falling income tells the lender something different in each case.
• Average variable income. Self-employed, commission, bonus and overtime income often swing from year to year, so lenders commonly average two years.
• Confirm the business has lasted. A business that has filed two years of returns has a track record.

If your latest year is lower, many lenders use the lower year rather than the average, because they want to rely on income you are likely to keep.

The NOA also shows whether you owe tax. Unpaid taxes can become a claim that ranks ahead of other creditors, so lenders want to see balances paid, or a clear arrangement in place, before they lend.

Who needs Notices of Assessment

• Self-employed borrowers, almost always.
• Employees with variable pay, such as commission, bonus or overtime.
• Salaried employees sometimes need only the latest NOA, or none, depending on the lender.

If you do not have two years of returns

Banks, credit unions and monoline lenders generally want two years for self-employed income. Some lenders and insurers have programs for people with a shorter history, especially if they work in the same field as before.

Alternative lenders, sometimes called B lenders, can consider bank statements or a shorter track record. Alternative lenders usually charge a higher rate, often with a fee disclosed in writing before you commit. The usual plan is to use an alternative lender for a term and move back to a bank lender once you have two years on file.

The stress test still applies at federally regulated lenders: the greater of your contract rate plus 2 percentage points, or 5.25%.

What to do next

If you are self-employed or paid on commission, use our call-me-back form and we will tell you which lenders fit your documents. You can also read about self-employed mortgages.