Lending Practices and Underwriting
Underwriting fundamentals
Underwriting assesses capacity, character, and collateral. Candidates must understand income verification (employment letters, pay stubs, notices of assessment, self-employed documentation), credit history and score interpretation, and the calculation of debt service ratios. Know the difference between gross debt service (GDS) and total debt service (TDS), and which obligations are included in each.
Ratios and stress testing
GDS compares housing costs (principal, interest, taxes, heating, and half of condo fees) to gross income; TDS adds all other debt obligations. Lenders apply a qualifying rate - often the greater of the contract rate plus a buffer or a benchmark rate - to test affordability. Candidates should know that different lender types may apply different standards, but federally regulated lenders follow federal rules.
Documentation and appraisal
Understand the role of appraisals and property valuation, title searches, and fraud prevention. Red flags include inflated appraisals, straw buyers, undisclosed secondary financing, and income documents that do not reconcile. Brokers must verify information rather than accept it, and must document the file.
Traps
A frequent trap is including or excluding the wrong debts from TDS - for example, omitting a co-signed loan or a lease obligation. Another is applying a lender's internal exception as if it were a rule. Questions may ask which ratio a specific cost belongs to; heating and property taxes are GDS items, credit cards are TDS items.
Worked rule of thumb
Compute TDS by adding all monthly debt payments to GDS housing costs, then divide by gross monthly income. If the result exceeds the lender's limit, the file needs compensating factors or a different product, not a creative reclassification of debt.