module 3.4 Flashcards
what are the different NOA documents
T-451 – issued with direct deposit, nil balance, or taxes owing
T-452 – issued only when the taxpayer receives an actual refund cheque from CRA
what is a financial statement
Financial statements are formal records of the financial activities of an incorporated business. They consist of income statements and balance sheets. For the purposes of a lender, financial statements must be audited or prepared by a certified accountant and must be appropriate to the type of business.
Lenders like to see financial statements (including income statements and balance sheets) for a period of time, usually the last three years. The financial statements must clearly demonstrate the existence of sufficient profits for the applicant to draw regular, recurring, and continuous income from the business.
what is an income statement
Income statements tell lenders where the revenue of the business (dollars earned in sales)came from and whether there is revenue left over in a particular reporting period. They summarize profits or losses for the business over a period of time by tracking revenue and operating expenses.
Lenders use income statements to judge the operating performance of the business. For example, are areas of the business over budget? Are there unexpected expenditures? Is the business operating in a manner that will support the applicant’s ability to repay a mortgage loan? In short, income statements show lenders how much a business is worth and help them to assess how much credit the owner of a business is eligible for.
Income statements also outline any tax liabilities of the business. If there are outstanding taxes, they must be paid in full before a lender will process an application or advance funding. The government is always paid before any other charges on a property.
what is a balance sheet
Balance sheets accompany income statements and list the assets and liabilities of the businessas well as the owner’s equity. They provide a snapshot of a company’s financial well-being at a given moment.
Liabilities plus the owner’s equity must be balanced out by the assets. Lenders use balance sheets to decide whether a business is in a financial position to allow growth or whether it is just surviving.
Business licences, articles of incorp, gst reg numbers
Other documents that may contribute to substantiating that an applicant is self-employed or operates a business include business registration documents, business licence, articles of incorporation, and GST registration numbers and returns or statements.
Income from traditional employment Permanent part-time job income Full-time job income Employment-related income Tips Profit-sharing Pension income Overtime pay Employment insurance Bonuses Self-employment or business income Sole proprietor Person with a 35% share in a business Corporation income Non-employment income Rental income Investment income Disability income Alimony
I work full time as an operations director for a shipping company. Notice of assessment (NOA) T4 slip Pay stub Employment letter I am a sole proprietor/small business owner. Income tax return Notice of assessment (NOA) Balance sheet Income statement I am a logger who works in the fall, winter, and summer. Notice of assessment (NOA) T4E slip Employment letter I am a single parent and want to use child support payments as part of my income in addition to my full-time income on my loan application. Notice of assessment (NOA) Divorce decree and/or alimony/child support agreement T4 slip Pay stub Employment letter I work full time at a hotel as a bellman and gratuities are a significant part of my income. Notice of assessment (NOA) T4 slip Pay stub Employment letter I run a day care in my home. Income tax return Notice of assessment (NOA) Balance sheet Income statement I am a freelance journalist. Notice of assessment (NOA) Balance sheet Income statement
Income Verification checklist
Letters of employment Pay stubs, net pay direct deposit receipts, bank statements T4 slips CRA Notice of Assessment Annual T1 General Income Tax Return Employment contracts or terms of employment agreements Sales receipts plus bank deposits T4PS slips T4E slips Itemized Statement of Benefits Paid Record of Employment form Pension documents Specify: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Invoices and bank statements Contracts and business agreements Bookkeeping records Business financial statements Business licences, articles of incorporation, GST registration numbers Divorce decree, separation agreement, court order, custody agreement T1198 form Lease agreements Investment income documents Specify: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Disability income documents Specify: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Trust income documents Specify: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
what are acceptable forms of downpayment
personal savings
gifts/inheritance where a gift letter accompanies the down payment and clearly outlines the funds at any time are not repayable.
sale of assets, chattel assets or investments
borrowing against assets (including equity in an existing real property used for a refinance)
sweat equity where qualified trades experience often must accompany this request (a journeyman electrician completing his own electrical work)
rent equity
Can personal declaration from applicants be used for down payment
An affidavit or declaration from an applicant stating that a down payment is from his or her own resources is NOT sufficient on its own. Nor is a letter from the bank stating that the applicant shows “x” amount of money in his or her account or that the applicant has sufficient funds in the account to cover the stated down payment. It is a simple matter to make a false declaration or forge a bank letter in today’s technological age.
Can personal declaration from applicants be used for down payment
An affidavit or declaration from an applicant stating that a down payment is from his or her own resources is NOT sufficient on its own. Nor is a letter from the bank stating that the applicant shows “x” amount of money in his or her account or that the applicant has sufficient funds in the account to cover the stated down payment. It is a simple matter to make a false declaration or forge a bank letter in today’s technological age.
red flags for down payment
A letter from a financial institutionstating that the applicant has a particular amount of money on deposit is not adequate proof of down payment because it does not indicate the source of the funds. Ask for original account statements so that you can verify the orderly accumulation of savings.
If the documents provided show that the account is newly opened, ask to see documentation from previous accounts.
Compare savings account balances with the applicant’s income. Make sure that the balance is realistic and reflective of income.
Investigate any recent, large deposits. Large deposits (for example inheritance monies) may be perfectly legitimate, but they need to be independently confirmed.
Also check large deposits to see if they coincide with credit enquiries on the credit report. If they do, it could mean that monies appearing in the applicant’s savings account may actually be from credit, which would affect his or her debt ratios.
Compare passbooks, statements,and printouts to other documents such as blank cheques to verify that the account numbers all match and therefore belong to the applicant.
If the applicant provides a blank or void cheque, cross-reference the bank branch number to verify that the bank and bank branch actually exist.
Look closely at the formatting of each document to check forpossible alterations or irregularities, such as the following:
misaligned numbers in columns
inconsistencies in the sequence of the dates
incorrect totals
discoloration of fonts
different font sizes and styles
Sweat Equity
It is possible to use “sweat equity” or physical labour in lieu of cash for a down payment although not all lenders will allow such an arrangement. As always, you must know the lender’s qualification requirements.
The use of sweat equity down payment is most common with new home builds but is also sometimes seen in situations where an applicant/buyer intends to make extensive renovations to a property,thereby increasing its appraised value.
For example, if Joe Contractor, the applicant, has the skills and ability to install plumbing, doelectrical wiring, or frame the new house he is purchasing, he could “pay” part of the down payment with his labour in performing these tasks. Applicants who want to use sweat equity towards their down payment must prove they have the necessary skills and available time to perform the work within an acceptable time frame.
Sweat equity cannot exceed a certain threshold of the overall % of down payment; lender guidelines will vary. Example: If Joe Contractor wants to purchase a new house valued at $400,000 and the underwriting guidelines stipulate a minimum down payment of 20% ($80,000), then Joe can use up to $40,000 worth of his labour for the down payment but must pay cash for the rest.
When sweat equity is used towards a down payment, lenders typically quantifylabour costs according to market rates through pre- and post-renovation appraisals. If the sweat equity is for a new build, lenders usually require the sweat equity labourto be completed before the mortgage funds are advanced.
In sweat equity cases, you need to gather the following documentation for the lender:
if the house is a new build – a construction agreement with the builder in which the sweat equity is clearly referenced and outlined
if the house is a rent-to-own– a current rental/lease agreement with an addendum stating what sweat equity is being done. NOTE: Verifying a rent-to-own agreement includes verifying the lease agreement and purchase contract.
invoices or quotes from subcontractors and/or for building materials
any separate contracts that outlinethe details of the sweat equity
calculations as to how much the sweat equity is worth
when will lenders accept rent equity down payments
There is a contractual or lease agreement in place that outlines the terms of the lease-to-own. The maximum portion of down payment that can come from rent is the amount that exceeds an appraiser-determined market rent for the property. For example, if George is paying $1,500 per month for rent, and the appraiser-determined market rent for the property is $1,200 per month, then a maximum of $300 per month can be used as rent equity.
The amount of rent actually paid can be proven. The lender may ask for bank statements to verify how much rent has come out of the renter/buyer’s account.
red flags with rent equity down payments
Does the address on the purchase contract match the address on the applicant’s driver’s licence or other primary ID? If the applicant is renting to own, then s/he should be residing at the property. If not, how can it be rent-to-own?
When is the lease agreement dated? If the agreement dates back one year, does the accumulated amount of down payment match?
Do the applicant’s bank statements over a period of time show regular withdrawal of an amount of rent that matches what is specified in the lease agreement?
Does the lease agreement include the purchase price, lease term, rent amount, and the portion going towards down payment?
Does the seller acknowledge receipt of the down payment in advance?
what are some other forms of equity for down payment sold for cash
life insurance policies
owned vehicles
owned real property (real estate)
owned personal property (jewellery, art, etc.)
what documentation is required for other evidence of equity for down payment
Documentation for any such assets needs to have the applicant’s name and address on them, as well as any relevant particulars (for example, account numbers, serial numbers, and VIN numbers).
down payment/equity verification checklist
Bank statements
Gift letters
Mortgage statement
Purchase contract and condition removal forms
Title document
Sale contracts or receipts from chattel sales
Asset/investment account statements
Specify: _________________
Asset/investment redemption statements
Line-of-credit statement with current balance
Personal loan documents with amounts
Construction or other agreements for sweat equity
Rent-to-own agreements
Specify: _________________
Lenders will want to see a property is worth the money invested. What documents do lenders want to see to prove…..
the property exists in the location that has been reported to the lender (property address and legal description)
the property is legally owned by the person(s) identified to the lender as the owner(s)(title information)
the property is in the state or condition reported to the lender (property details and features)
the property has appropriate current and future value (purchase price and/or assessed value)
the property is not affected by invisible or unreported conditions that may decrease its value or ability to be sold
What are generally documents requierd to verify real property transactions
purchase contract (offer to purchase) feature sheet/MLS sheet title document real property report municipal property assessment notice
What to verify on purchase contracts P I
Ensure that the purchase contract indicates who is holding the deposit
It should be the listing real estate office or lawyer. If the deposit is being held by the seller, or if the deposit is the full amount of the down payment, find out why. The seller should not be holding the deposit. Even if the sale is between relatives, the deposit can be paid to anyone but typically it is the real estate brokerage or a lawyer that holds the funds in trust; otherwise, no one knows for sure that the deposit really exists and that the price of the house is authentic. In private sales where there is no real estate industry member present, the deposit should go to a lawyer to be held in trust. In either case, if there is a need to verify the funds have been received and are in trust then who the verification and who has responsibility for conducting it need to be noted within the contract.
What to verify on purchase contract P II
Ensure all amendments, schedules, and addenda are accounted for and attached to the purchase contract.
If chattels (such as boats, furniture, cars, and other personal property aside from appliances) are included in the offer, ask for schedules to determine the real estate value only. If the seller is providing additional financing, make sure you have all relevant schedules so that you and the lender can take into consideration how the additional financing will affect value and qualification. Preferential financing provided by a seller can lure a purchaser into paying an inflated price for the property and affect the debt ratios.
what to verify on purchase contract P III
Review and cross-reference dates on the purchase contract and the mortgage application.
If there is a long gap, this may indicate that the applicant had problems obtaining financing. If there is a short financing date on the purchase contract, this may be a fraud tactic to pressure lenders for a quick decision. Dates on other documentation should align properly as well.
what to verify on purchase contract P IV
Watch for conditions on the purchase contract regarding existing tenants. Is it a possible rental?
Rental properties do not qualify for the most favourable financing terms, so often purchases for rental purposes are misrepresented as owner-occupied to obtain better financing terms.
what to verify on purchase contract P V
Look to see if the agent and/or witness are the same on the offer to purchase.
If they are the same, proceed with extra caution.
what does or should the feature sheet/MLS list
street address and legal description of the property
information about the listing agent
assessed property taxes
exterior and interior photos of the property
the year the house was built
the size of the lot and the house
description of various selling features (such as updates and conveniences)
