Module 2.4

Question 1

3 structures mortgage products are designed

Answer 1

1. purpose
2. form
3. function

Question 2

what is the purpose of mortgage products

Answer 2

to facilitate the financing of property according to type or use

Question 3

what is the form of mortgage products

Answer 3

the form of mortgage products exists within the structures, terms, and conditions of a mortgage loan. form also includes the borrower qualification criteria for the product

Question 4

what is the function of mortgage products

Answer 4

related to the options around basic mortgage transactions in combination with a view to general borrower characteristics, motivations, and needs.

Desire to create product differentiation between lenders is also a factor in the development of mortgage prduct features and options

Question 5

3 examples of Purpose

Answer 5

• Residential (Single-family, condo, cottage, recreational)
• Commercial/ Industrial (office space, hotel, motel, restaurant, shopping mall, factory, workshop, warehouse, rental units)
• Agri-business (farmland, farm buildings, farm equipment)

Question 6

Examples of form

Answer 6

• Int rate
• term
• am
• pmt schedule
• prepayment options
• payout penalties
• down payment
• default insurance
• qualification

Question 7

2 types of functions and their examples

Answer 7

Mortgate transactions - Purchase, renew, switch, refi, borrow equity, pay off

Borrower characteristics - Conventional, non-traditionally employed, new immigrant, green, high - risk/ poor credit, etc…)

Question 8

6 examples of specialized mortgage products

Answer 8

purchase plus improvements mortgage products
builder’s mortgages/construction products
cash back mortgage products
secured line of credit products
alternative documentation or stated income for business for self products
reverse mortgage products

Question 9

how do they award purchase plus improvements

Answer 9

For a purchase plus improvements mortgage, the LTV and final loan amount are calculated using cost quotes for the improvements to determine the future value of the property. In this context, the future value is the estimated value after the proposed improvements are completed.

For example: If your applicant wants to purchase a home that has good value but needs bathroom upgrades, the lender would look at and assess whether purchase price of the property PLUS quotes for the projected cost of the improvements adds up to a realistic future value for the home.

Question 10

what are restrictions for p+improvements

Answer 10

Lenders typically require that the improvements do not exceed 10% of the purchase price of the property. In addition, they generally allow only 90 days to complete the improvements.

Question 11

Benefits of P+Imp

Answer 11

Single loan

The borrower can finance a purchase and a renovation with a single loan at first mortgage rates, which is less expensive than taking a second mortgage later for the renovations.

Single qualification process

There is no requirement to qualify for a second loan (for the renovations) once the borrower is already carrying a large first mortgage.

Question 12

Disadvantages to P+Imp

Answer 12

Timing

The borrower must have one or more legitimate contractor estimates for the improvements (which requires that contractors be able to enter the seller’s home) before an offer can be made.

Delayed release of funds

The borrower generally has to pay for the improvements up front and be later reimbursed for the costs once a lender-approved inspector verifies that the improvements do, in fact, add the initially estimated value to the property.

Question 13

what are two types of builder loans

Answer 13

builder’s loans (also called draw mortgages)

completion mortgages

Question 14

Why are builders loaned used

Answer 14

Builder’s loans are for people building their own homes or for builders constructing new homes.

Question 15

How are builders loans advanced

Answer 15

With a builder’s loan, the borrower (builder) must put all of his or her available equity (down payment) into the project before the lender will advance any funds. The mortgage money is advanced in stages (draws), based on how close the construction is to completion (percentage complete) and the retail cost-to-complete (as opposed to the cost of the work already completed).

Question 16

what are holdsbacks

Answer 16

Policies about how many draws and how much of the total loan amount is advanced or held back at what stage may vary, but the table below shows the general scenario for starter or standard homes. Each stage is confirmed by a physical inspection before funds are advanced.

Part of the money held back at each stage is in compliance to the Builder’s Lien Act, which requires that 10% of the value of the work done or materials supplied be held back for 45 days after the work has been completed or the materials have been received in order to pay out any suppliers or workers who may have registered a lien against the project.

Question 17

Builders loan compensation and schedule

Answer 17

Construction stage and draw Percent complete Holdback + lien
First draw at lock-up stage (when the roof, walls, windows, and doors are in place, and it is possible to “lock up”)

35%–40%

60%–65%

Second draw at drywall stage (interior is complete to application of drywall; only finishing-related work remains)

60%–65%

35%–40%

Third draw at completion

100%

0%

Question 18

What is a completion mortgage

Answer 18

Completion mortgages are for people buying newly constructed homes from a builder

Question 19

How are funds advanced on completion mortgage

Answer 19

With a completion mortgage, the buyer usually makes a down payment through a series of several installments (often about a month apart), with the balance of funds due when the newly constructed property is 100% complete. Outside of the way the down payment is paid, a completion mortgage is a single-advance mortgage, just like a standard residential mortgage.

All new homes built in Alberta require new home warranty coverage if the building permit was applied for on or after February 1, 2014. Prior to this, some new homes in Alberta were covered by home warranty. Your home purchase documents will include this information.

Question 20

Cash back mortgage products

Answer 20

Cash back mortgage products give qualified borrowers a percentage of their mortgage loan as a rebate at the time of closing. The rebate varies from 1% to 5% of the mortgage amount, depending on the bank and the term chosen.

Cash back mortgages are typically fixed-rate mortgages, not variable-rate mortgages. They usually carry a slightly higher interest rate to compensate the lender for the rebate.

Question 21

restrictions on cash back mortgages

Answer 21

The cash back rebate can often be used to use towards anything although some lenders may restrict the uses of the cash back by stipulating certain exceptions. For example, some lenders will permit the cash back to be used towards the down payment while others will not.

Question 22

benefits of cash back mortgage

Answer 22

The benefit of a cash back mortgage is that it gives first-time buyers a small cash cushion to get them through the first few months of home ownership or extra funds to be used for home improvements such as blinds, carpet, appliances, or furniture.

Question 23

Disadvantages of cash mortgages

Answer 23

The disadvantage is that cash back products carry a slightly higher interest rate for the entire term, which more than compensates the lender for the cash rebate.

Question 24

What is max loan amount and how are funds advanced for secured line of credits

Answer 24

The lender sets a maximum loan amount based on the borrower’s equity in the property. Unlike a typical mortgage, the loan amount is not advanced in full to the borrower. Instead, like a credit card (revolving credit), the loan amount represents the maximum amount against which the borrower can draw.

Question 25

What is the min payment on a secured LOC

Answer 25

The minimum payment is the monthly interest cost on the amount currently drawn against the loan. Like a credit card, the borrower only pays interest on the amount that is actually drawn against the maximum credit limit.

Question 26

Benefits of secured LOC

Answer 26

The main advantage of a secured line of credit is its flexibility. Some LOC products allow the borrower to:

convert to a fixed-rate home equity loan (a more traditional second mortgage) at any time;
place part of the mortgage in a traditional fixed-rate term and keep part in the variable-rate secured line of credit; and
pay off the loan in full—without penalties—at any time.
In addition, they generally carry a low interest rate, are inexpensive to set up, and have no early payout penalties.

Question 27

disadvantages of secured LOC

Answer 27

The main disadvantages of a secured line of credit include the following:

They carry the risk of sudden and/or unpredictable rate increases. This is because they are typically variable-rate mortgages, based on the prime rate plus a lender margin, with interest calculated daily.
Because they provide such easy access to credit, people who are not disciplined about their spending can easily get into financial trouble. And, as a type of revolving credit, secured lines of credit are reported to credit agencies and have an impact on the borrower’s credit score.

Question 28

What are Self-Employed Mortgage products

Answer 28

No documentation low documentation, alternative documentation, no verification, and stated income products have ultimately been eliminated due to the direction of OSFI and therefore regulated lenders are unable to process these types of mortgage transactions today. Similar products are offered through private lenders. As the majority of the loans submitted today by mortgage professionals are managed through regulated lenders, we will not be expanding on this section further. Refer to the product overview section for Business for Self.

Question 29

what are reverse mortgages

Answer 29

Homeowners 55 years old and above can access up to 55% of the value of their home without having to make payments of interest or principal for as long as they own their home. The loan amount is determined by four factors:

age(s)
type of home
location
current appraised value
With zero interest and principal payments, the unpaid interest accrues over time, and the balance outstanding increases over time, resulting in a "Reverse Amortization" commonly known as a Reverse Mortgage. Be aware that in this scenario this mortgage pays the client monthly, rather than the client paying the lender monthly.

Loan-to-Value ratios are very conservative (ranging from 25% for a 55-year old client to 65% for an 85-year old client) which means home appreciation typically covers the accrued interest. Reverse mortgage providers in Canada guarantee that the homeowner(s) will never owe more than the fair market value of the property at time of sale which protects the homeowner(s) from being in a negative equity position.

Question 30

Benefits of reverse mortgages

Answer 30

Borrowers do not need to follow the traditional qualifying process. An income test is done only to ensure the homeowner(s) have sufficient income to cover property taxes and fire insurance or condo fees. Verification of income is only necessary if the homeowner(s) beacon score is below a threshold.

No payments required. Payment of interest and/or principal optional
No medical qualifications
Life mortgage (non-callable)
Funds are tax-free

Question 31

what are set up costs for reverse mortgages

Answer 31

Appraisal
Legal, Closing & Administrative costs
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