Qualifying the Borrower: Income, Credit and Down Payment
The three pillars
Qualification rests on income, credit, and down payment. Lenders verify income through employment letters, pay stubs, tax documents, and for self-employed borrowers, notices of assessment and financial statements. Credit is assessed via score, history, and derogatory items. Down payment must be verified for source and seasoning; borrowed down payments may be restricted.
Ratios
Two key ratios: gross debt service (GDS) and total debt service (TDS). GDS compares housing costs (principal, interest, taxes, heating, and half of condo fees) to gross income; TDS adds all other debt obligations. Lenders set maximums, often around 39% GDS and 44% TDS for insured mortgages, though guidelines evolve.
Traps
Watch for unverified income, gifts without documentation, and down payment funds that appear suddenly. Another trap: using net rather than gross income, or forgetting to include heating and property taxes in GDS. Self-employed income must be supported by documentation.
Worked example
Monthly gross income $6,000. Housing costs: mortgage $1,500, taxes $300, heat $100 = $1,900. GDS = $1,900 ÷ $6,000 = 31.7%. If other debts are $500, TDS = $2,400 ÷ $6,000 = 40%. Both under typical limits. Rule of thumb: GDS uses housing costs; TDS adds all debts.
Mortgage Mathematics and Underwriting Calculations
Core calculations
Candidates must compute LTV, GDS, TDS, and basic payment and interest figures. Payments are typically calculated using amortization formulas; for exam purposes, know the relationships: higher rate or shorter amortization increases payment; longer amortization lowers payment but increases total interest. Prepayment penalties for fixed-rate mortgages often use the greater of three months' interest or the interest rate differential (IRD).
Formulas to know
- LTV = loan ÷ value.
- GDS = (PITH) ÷ gross income.
- TDS = (PITH + other debts) ÷ gross income.
- Simple interest = principal × rate × time.
Traps
Common errors: mixing monthly and annual figures, forgetting to convert percentages to decimals, and using net income. Another trap: applying the wrong penalty method. Always check whether the question asks for monthly or annual amounts.
Worked example
A $300,000 mortgage at 5% annual, interest-only for one month: $300,000 × 0.05 ÷ 12 = $1,250. If the question asks for three months' interest, multiply by 3 = $3,750. Rule of thumb: convert annual rate to monthly by dividing by 12, and keep units consistent throughout.
Fraud Prevention
Types of fraud
Mortgage fraud includes identity fraud, income falsification, straw buyers, property flipping schemes, and appraisal fraud. Candidates must recognize red flags: pressure to close quickly, inconsistent documents, unexplained down payment funds, and borrowers who seem unfamiliar with the property.
Prevention duties
Licensees must verify identity, validate documents, and report suspicious activity. Know-your-client (KYC) and anti-money-laundering obligations apply. Do not assist in misrepresentation, even if the borrower requests it; doing so risks licence revocation and criminal liability.
Traps
A frequent exam trap is a scenario where a broker is asked to "hold" or "adjust" documents - that is fraud facilitation. Another trap: assuming a lender's approval absolves the broker of verification duties. Also, be alert to fraud by insiders and to the difference between error and intentional misrepresentation.
Worked example
Rule of thumb: if a document looks altered or a borrower cannot explain the source of funds, stop and verify. Document your verification steps. If a question asks what to do when fraud is suspected, the answer is generally to not proceed, escalate, and report as required.
Fraud Prevention, Ethics and Consumer Protection
Ethical duties
Licensees must act in the borrower's best interest where applicable, disclose conflicts, avoid misleading advertising, and ensure suitability of products. Consumer protection includes clear disclosure of fees, costs, and terms, and fair treatment throughout the transaction.
Consumer protection concepts
Know the role of disclosure statements, the right to clear information, and complaint mechanisms. Misleading or high-pressure sales tactics are prohibited. Privacy obligations require safeguarding personal information.
Traps
Questions often test whether a broker may accept undisclosed incentives from a lender - generally no without disclosure. Another trap: assuming the cheapest product is always suitable; suitability depends on the borrower's circumstances. Also, advertising must not promise guaranteed approvals or misstate rates.
Worked example
If a lender offers a broker an incentive to place a loan, the broker must disclose it and ensure it does not compromise suitability. Rule of thumb: if you would not be comfortable explaining the arrangement to the borrower in writing, do not do it.