Module 7: Qualifying the Borrower

Question 1

What is mortgage underwriting?

Answer 1

Underwriting is the analysis of the investment merits of the mortgage loan determined by assessing the borrower and the property.

Question 2

The process at qualifying the borrower looks at two interrelated factors:

Answer 2

1. The borrowers ability to make payments on the mortgage loan.
2. The borrowers willingness to make the payments - will the borrower honor the mortgage loan’s contractual obligations?

Question 3

What are the 5 C’s of credit?

Answer 3

-Capital
-Credit
-Capacity
-Collateral
-Character

Question 4

Define Capital from the 5 C’s of credit:

Answer 4

The amount of money that the borrower has put into the deal. Shows skin in the game.

Question 5

Define Credit from the 5 C’s of credit:

Answer 5

The credit history/the borrowers repayment history.

Question 6

Define Capacity from the 5 C’s of credit:

Answer 6

The ability of the borrower to repay loans. This is the most critical of the 5

Question 7

Define Collateral from the 5 C’s of credit:

Answer 7

The additional security that can be provided to the lender if the borrower were to default. This is typically the property that is being mortgaged.

Question 8

Define Character from the 5 C’s of credit:

Answer 8

The general impression of how credit worthy the borrower is.

Question 9

When reviewing the borrowers income what are different types of eligible income?

Answer 9

-Salary/wage from full time or part time employment
-Overtime, commission, bonus and profit sharing
-Investment income, pension income, rental
-Income, disability income, trust income
-Parental leave payments
-Parental support and alimony

Question 10

When reviewing a borrowers income, what are some types of income that are ineligible?

Answer 10

-Social Assistance
-Employment Insurance
-Family allowance tax credit benefit
-Boarder income
-Projected income or projected bonuses

Question 11

What type of documents are typically asked of a salaried individual?

Answer 11

-Letter of Employment
-T4
-Notice of Assessment
-Pay stubs
-tax returns
-Financial statements

Question 12

What type of income verification documents are typically asked of a self-employed individual?

Answer 12

-Tax Returns
-Business financial statemetns
-Business credit report
-Articles of incorporation

Question 13

What is a mortgage guarantor and what role do they play?f

Answer 13

A guarantor is a person who helps an applicant obtain a loan by guaranteeing that the loan be repaid in full. This is done by either signing the original mortgage or by a separate guarantee agreement.

Question 14

What are the 3 types of business ownership?

Answer 14

-Sole Proprietorship: earnings right to owner, no separate tax filing.
-Partnership: Also, no separate tax filing as earnings right to owners.
-Corporation: Corporation pays its own taxes thus separate tax filing. Owners have limited liability.

Question 15

Typical financial statements have the following 5 parts:

Answer 15

1. Balance Sheet
2. Income Statement
3. Statement of Retained Earnings
4. Statement of Changes in Financial Position
5. Notes to the Financial Statements

Question 16

What are the two components to the Notes to Financial Statements?

Answer 16

1. Accountant or auditor reporting any potential problems in the financial statements.
2. Other relevant disclosures including things such as changes in accounting procedures, terms of long-term debt, etc..

Question 17

What is a credit report?

Answer 17

A credit report is a decsription of the applicants credit records, past and present from which the expected future financial situation and behaviour can be estimated.

Question 18

What are the main sections of a credit report that you should review?

Answer 18

1. Identification
2. Inquiries
3. Employment
4. Credit Score
5. Public Records and Trade Information

Question 19

What do each of the letters in a credit report stand for?

Answer 19

Open Credit (O)
Revolving (R)
Installment (I)
Lease Account (L)
Mortgage (M, not always reported)
Equifax also has a Line of Credit represented by a C

Question 20

The numbers beside the letters in a credit report represent what?

Answer 20

The numbers range from 0 (too new to rate) to 9 for bad debt, placed for collection.

Question 21

Credit scores range from what to what?

Answer 21

300 to 900

Question 22

What is the Gross Debt Service Ratio (GDS)?

Answer 22

The GDS includes all of the debts that are associated with housing - principal payments, interest, taxes, heating (plus 1/2 of condo fees if applicable), often referred to as PITH.

GDS = PITH + 0.5 Condo Fees / Total Gross Qualifying Income

Generally lenders use a GDS ratio between 35% and 39%

Question 23

What is the Total Debt Service Ratio (TDS)?

Answer 23

Includes all of the housing related debts (GDS) plus any other loans such as credit card payments and car payments. Generally lenders use a TDS ratio of 40-44%.

TDS = PITH + All Other Debt / Total Gross Qualifying Income

Question 24

Associate mortgage lenders should consult individual lenders on eligible and ineligible income because…

Answer 24

Eligible income may vary from lender to lender