Borrower Qualification, Income, and Credit Analysis
Qualifying the Borrower
Candidates must understand the two federal stress-test benchmarks: the greater of the contractual rate plus two percentage points, or the prescribed minimum qualifying rate. Know gross debt service (GDS) and total debt service (TDS) ratios and how they differ, and how lenders treat heating costs, property taxes, condo fees, and half of any rental income. Understand down payment source verification, the loan-to-value tiers, and refinance limits.
Income and Credit
Distinguish salaried, hourly, self-employed, commission, pension, and rental income, and know that self-employed borrowers typically require two years of notices of assessment and may need an add-back analysis. Credit analysis covers beacon scores, tradelines, utilization, derogatory items, and the difference between a credit inquiry and a hard hit. Understand that alternative lending uses different documentation standards but higher pricing.
Traps in Exam Questions
Common traps: using gross rather than net rental income, forgetting to include property tax in GDS, treating a co-signer's income as fully usable, and assuming a pre-approval guarantees funding. Another trap is ignoring that a large down payment gift must be documented as a true gift with no repayment obligation. Watch for questions where a borrower's stated income conflicts with documentation - fraud red flags apply.
Rule of Thumb
TDS is always greater than or equal to GDS; if a calculation shows otherwise, you have omitted or misclassified a housing cost.
Worked example: Housing costs of $2,000 monthly plus other debts of $600 on gross monthly income of $8,000 gives GDS of 25% and TDS of 32.5%. Compare both to the lender's limits under the stress-tested rate.