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)
what checks to perform on MLS
On an MLS sheet, the real estate professional’s name, brokerage, contact information, contract date, and expiry date should be displayed on the listing. Forged MLS sheets are often missing some of these details.
If an MLS listing sheet has been provided, double-check that the property is listed on the MLS website. If an MLS sheet has been provided, then the property should appear on the real estate board’s listing system. If it does not, this may indicate that the MLS sheet is a forgery.
Is it a private sale? If an MLS listing sheet is provided in a private sale situation, the property should appear on the MLS website as well. If it does not, the MLS sheet may be a forgery with the for-sale-by-owner misrepresented as an MLS sale.
Due dilligence for title documents
Are there any encumbrances on title? If so, do the dates and amount of encumbrances make sense?
Ensure that the applicants/borrowers name(s) is on the title. If not, s/he does not have the right to be refinancing or renewing the mortgage.
Is there a spouse named on the title? If there has been an estrangement Dower Rights may affect the ability of the property to be sold.
Documents required for sale by owner
purchase contract (offer to purchase)
property details sheet
title document
real property report
municipal property assessment notice
new home warranty certificate (for new homes only)
The exception in this document list is that with a sale-by-owner, there is no MLS sheet and sometimes no feature sheet either.
Further information on this topic is provided in Session 3-4-5: Verifying property documents.Additional due diligence may include the following:
Perform a title search to ensure the owner name on the sale contract matches the seller.
Conduct an Internet search on the property address and/orask for the assistance of a licensed real estate professional to review MLS history to determine if the property has been involved in multiple recent transactions or historical postings.
Find out whether the property has been a recent purchase and perhaps an inflated “flip” or land purchase from a developer.
Ensure the property exists as described by visiting the subject property.
Review the offer to purchaseand look to see if the same witness is used for both buyer and seller.
Documents requied for new home build
copies of all quotes (if self-build)
project cost breakdown from builder (fixed costs, bids, estimates, and allowances)
signed contract with builder and all addenda (if applicable)
offer to purchase for land (or a copy of title if already owned)
if the land is already owned, details of any charge registered against it
full appraisal
plans/house specifications/drawings
proof of fire insurance
third-party new home warranty certificate(as addressed in general in Session 2-1-2: Lender and borrower security and in more detail in Session 3-7-3: Reviewing the market for other kinds of insurance). Some lenders want to see the certificate; some also want confirmation from the lawyer involved.
what are some lender concerns for new builds
- lenders want to see appropriate down payment and cash in reserve, and perhaps willingness to scale back if required
- Building plans and specs to review what, where, and how much of a particular material is to be used, timelines, and project scope. From there lenders can look at:
what the property is expected to look like when completed so they can accurately determine value and marketability. Lenders prefer new builds that are designed for re-sale: not too big, not too customized, not too expensive. Quality, not quantity.
when and how the property will be completed
what the terms, costs, and expectations are for construction of the property
For high ratio new builds, is warranty required and 3 warranty services ?
Yes and
Alberta new home warranty or national home warranty or another home warranty certificate provider.
Documents required for refi or renewal
current payout statement or mortgage statement(showing outstanding mortgage balance)or mortgage renewal offer
mortgage discharge document (for refinancing on fully paid-out mortgage)
most recent property assessment, municipal tax notice, and proof of payment
title search (copy of title)
proof of fire insurance
stated purpose foradditional funds (for refinance)—for example, home improvement project, returning to school, consolidating debt.
what does a payout statement show
- Outstanding balance
- what the interest rate was compared to what the new interest rate is going to be
- the amount of penalty for breaking the term of the loan
- info about ownership of property
List of documents of existing property
Title document Real property report Purchase contract Municipal property assessment notice Feature sheet or MLS sheet
list of documents for sale-by-owner
Title document Real property report Purchase contract Property details sheet New home warranty certificate (if it is a new home) Municipal property assessment notice
List of documents for newly built properties
Third-party new home warranty certificate Signed contract with builder Proof of fire insurance Offer to purchase for land House plans Details of any charge against the land Copies of quotes Builder’s project cost breakdown
what are lender concerns for condos
bylaws that may affect occupancy or marketability
property management
condo association finances
operating and reserve funds
reserve fund study
structural integrity of the property
owner-to-tenant ratios
construction warranties that may affect assessment of property quality and marketability
other things that could affect a lender’s decision to finance
documents required for condos
purchase contract
feature sheet and/or MLS sheet
reserve fund study and plan or letter indicating anticipated completion/availability date of the study and plan
post-tension cabling and engineer’s reports
tenant/resident ratios and/or occupancy ratios
annual general meeting and condo board meeting minutes
condo association bylaws
lease agreements
financial statements and budgets (including any special assessments)
insurance certificates indicating that the common areas are insured
Estoppel certificate
Condos - what is post-tensioned cable construction
In the 1970s and 1980s, many buildings were erected using post-tensioned cable (PTC) construction. Without proper preventative maintenance, this kind of construction has proven to deteriorate and even fail over time. Maintenance and replacement costs for PTC construction are potentially very significant. Because these expenses are the responsibility of the condo corporation, it is a concern to lenders when considering financing buildings from this era.
How to find PTC construction condos
reading the reserve fund study
calling the insurer to determine if the property is eligible for insurance (including the plan number or building name), as not all insurers will insure this type of real estate.
reading the engineering report
An engineering report documents the following:
condition of structural features such as walls, foundations, drainage systems, and post-tensioned cabling systems
projected costs related to structural or preventative maintenance programs
Condos - what is tenant/resident ratio
Tenant-to-resident ratios and occupancy ratios tell the lender about pride of ownership, which ultimately links back to the marketability of the property. Pride of ownership refers to the extra care that a homeowner (as opposed to a renter) will take with his or her property because s/he has much more invested.
where can you get tenant - resident ratio docs
condo management company or board
What is an Estoppel Certificate
An Estoppel certificate is a document that the transaction lawyer is obligated to get from the condominium corporation in the month that the deal is closing. It is a formal confirmation that acts as evidence that there are no overdue contributions, assessments or fees being carried forward from the seller to the new purchaser.
Condo Docs checklist 1
Operating budget (current year)
Condominium fee schedule for current operating budget
Most recent special assessment letter (within last 18 months) if it occurred
Audited (or non-audited) financial statements to most recent year end
Balance sheet to the most recent month end, including the amount of dollars in the reserve fund account
Reserve fund study and plan (or letter indicating anticipated completion/availability date of the study and plan)
Minutes of the most recent annual general meeting of the owners
Board of directors meeting minutes (minimum of four meetings)
Bylaws and any amendments
Insurance certificate
Management contract
Any engineering reports or summaries; recent post-tensioned cable report, mechanical report, roof report
Offer to purchase or sales agreement and MLS sheet
Estoppel certificate
Titled parking document
Restrictive covenants (parking, etc.)
Newsletter/complex information
Lease agreement or licence of use agreement (parking/storage)
House regulations and rules
Special assessments
Condo docs checklist 2 for purchasing new condo
Offer to purchase or sales agreement
Estoppel certificate
Proposed condominium fee schedule for proposed operating budget
Reserve fund study and reserve fund plan (mandatory for conversion projects)
Proposed condominium plan and any re-division plan
Proposed site plan/landscaping plan
Proposed bylaws
Proposed management contract
Specifications/modifications/extras
Restrictive covenants (parking, etc.)
Parking lease (if applicable)
For a newly constructed complex: new home warranty program information
For a newly constructed complex: description or drawings of the landscaping, roadways, retaining walls, etc.
Easements, party wall agreement, conveyancing agreement
Proposed lease agreement or licence of use agreement (parking/storage)
Phasing agreement (when applicable)
Life lease agreement (if complex is for older residents on that basis)
Builder and/or new home warranty certificates
When would structural reports be requiered for verification
May be required for a new build or for an existing property with apparent problems
May be part of a condo assessment
May be required if a concern has been identified by the listing agent or if an appraisal report comes back with concerns
May be required to rule out problems on an older property (for example, if it has a timber foundation rather than concrete)
when would an environmental assessment report be required
Typically only required for commercial deals
May be required in residential cases where the location has been identified as a problem area (for example, residential houses built on a former industrial site or houses identified as former grow-ops)
May be required in residential cases where water potability could be an issue (for example, a home that uses well water)
when would an offer of mortgage from bendor to buyer be required
vendor financing for a private sale
Property Verification checklist
Purchase contracts Feature sheets/MLS sheets/Property details sheets Title document Real property report Municipal property assessment notice Municipal tax notice and proof of payment Payout statement Mortgage statement Mortgage discharge document Proof of fire insurance Proof of home owner’s insurance Appraisal report Other (specify): \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
two questions lenders expect you to address with alimony or child support
Does the applicant have alimony or child support payments to make?
How has the matrimonial property and/or other assets been divided?
Documents required for divorce
Proof of legal separation or divorce
proof of alimony or child support
what document for proof of legal separtion or divorce
divorce decree or legal separation or divorce agreement
what documents for proof of alimony
court order or custody agreement
T1198 form (Statement of Qualifying Retroactive Lump-sum Payment), for lump-sum payment of support
annual T1 General Income Tax Return (lines 230 and 220 relate to support payments made)
CRA Notice of Assessment – If support payments have been made and claimed as deductions by the applicant on his or her income tax return, the NOA should verify this.
copies of cancelled cheques and/or bank statements(to show regular alimony or child support payments)
Verification division of property and assets
The division of assets in a divorce can range from splitting up the CD collection, to dividing chattels and joint bank accounts, to selling the matrimonial home. Selling the home shared by a married couple is dealt with separately in Verifying release of Dower Rights, below.
Lenders will want to see whether any bank accounts or chattels being claimed on the mortgage application have been or will be divided in divorce proceedings
what documents required to prove division of property/ assets for divorce
Court order legal separation or divorce agreement
bank statements
division of debt documents
Verifying release of dower rights
Another aspect of dividing property after separation or divorce involves consideration of Dower Rights. Dower Rights prevent the selling of the matrimonial home (the property that a married couple shared during the course of their marriage) without the consent of the spouse to do so even if that spouse is not on the title of that property.
If a property is being sold by one of the spouses, lenders want to ensure that Dower Rights have been released or waived. If the applicant can provide one of the following, it will be sufficient evidence that Dower Rights have been released or waived:
Documents required for dower rights
Disposition of property
Form A: Consent of Spouse, accompanied by
Form C: Certificate of acknowledgement of spouse
Form B Affidavit
Form D release of dower rights - accompanied
Form E: Affidavit in support of dower release
what is consumer proposal
is a legally binding, negotiated settlement made between a debtor and his or her creditors. The debtor makes arranged payments over a period of no more than five years and that money is divided among the creditors. At the end of the time period, the remaining debt is discharged even though less than the full amount owed has been paid.
what is bankruptcy
is a voluntary legal proceeding involving a person or business that is unable to repay outstanding debt. All of the assets of the person or business are assessed for value and liquidated, and the proceeds are divided among the creditors. The assets may not pay off the entire debt, but once the process is over, the debt is over.
Documents to verify that consumer proposal has been discharged
Certificate of Full Performance
appropriate paperwork, showing a list of creditors, accounts, and balances
documents showing the history of repayments
Documents to verify bankruptcy has been discharged
statement of discharge (Order of Absolute Discharge document)
bankruptcy papers showing a list of creditors, accounts, and balances
Documents required for dissolution of business or partnership
Articles of Dissolution form
Statement of intent to dissolve form
final tax return
evidence that ferderal busness accounts have been closed or deregistered
what is articles of dissolution form
Used to voluntarily dissolve a legal entity (corporation) that is no longer in business, has not issued shares, has no property or liabilities, or has never conducted business.
Statement of Intent to Dissolve form
Used to voluntarily dissolve a corporation that has issued shares, has conducted business, and has property or liabilities.
Evidence that federal business accounts have been closed or deregistered
Related to, for example, payroll documents, T4 slips and T4 Summaries, GST/HST accounts, and Business Number accounts.
5 Step process for fraud
Retain all documentation.
Write down everything about the transaction that has not already been documented.
Refer the case to the broker, and follow the brokerage’s internal reporting procedures.
Report the case to the police.
Report the case to RECA.
