PROP 1023 / CHAPTER 7 Flashcards Preview

PROP 1023 > PROP 1023 / CHAPTER 7 > Flashcards

Flashcards in PROP 1023 / CHAPTER 7 Deck (23):
1

__________ refers to the process of measuring the borrower's financial ability to repay loans, of estimating the long-term value of the property used to secure the loan, and of estimating the borrower's willingness to repay the debt.

Mortgage underwriting refers to the process of measuring the borrower's financial ability to repay loans, of esti­mating the long-term value of the property used to secure the loan, and of estimating the borrower's willingness to repay the debt (credit record).​

2

A lender's primary concern is default. In order to obtain some protection against default, lenders will generally restrict the loan so that only a specified portion of the borrower's income will be needed to repay the mortgage debt. In practice, two ratios are commonly used:

ANSWER:

GROSS DEBT SERVICE (GDS)

TOTAL DEBT SERVICE (TDS)

3

What are the 5Cs of credit?

1. Character

2. Capital — How much money will the borrower personally invest in the property (the down payment)? 

3. Capacity — Can the borrower repay the loan? 

4. Credit — What is the borrower's credit/repayment history? 

5. Collateral — What is the additional security for the loan in case a borrower is unable to repay it? In a residential real estate transaction, the real property is typically pledged as security for the loan.

4

________ is a long-term, conservative estimate of the value of the property pledged as security for a loan. In forming this estimate, the characteristics of the land, improvements, and surrounding area are all evaluated in detail. 

ANSWER:  LENDING VALUE

5

This is the maximum loan amount determined by taking a percentage of the lending value. 

ANSWER:  LOAN-TO-VALUE RATIO

6

The __________ is typically defined as the ratio of the sum of the annual first mortgage payments (principal and interest or P + I) and real property taxes (T) to annual gross income (GI)

The gross debt service ratio is typically defined as the ratio of the sum of the annual first mortgage payments (principal and interest or P + I) and real property taxes (T) to annual gross income (GI)

7

NOTE ONLY / MORTGAGE INSURANCE

 

The Government of Canada's national housing agency, Canada Mortgage and Housing Corporation (CMHC), is one institution that provides mortgage loan insurance. More detailed information about CMHC's mortgage loan insurance program, including insurance rates and terms, can be found on CMHC's website at: www.cmhc-schl.gc.ca.

 

The outstanding amount of CMHC-insurance-in-force has grown significantly from $243.8 billion in 2004 to $557.1 billion in 2014.

 

Mortgage insurance is also available from private companies, Genworth Financial Canada (www.genworth.ca) and Canada Guaranty Mortgage Insurance Company (www.canadaguaranty.ca).

 

Total Canadian private mortgage securitization outstanding represents a much smaller segment of the overall market and has declined from $23.68 billion in 2008 to $17.67 billion in 2013.5

NOTE ONLY / MORTGAGE INSURANCE

 

The Government of Canada's national housing agency, Canada Mortgage and Housing Corporation (CMHC), is one institution that provides mortgage loan insurance. More detailed information about CMHC's mortgage loan insurance program, including insurance rates and terms, can be found on CMHC's website at: www.cmhc-schl.gc.ca. 

The outstanding amount of CMHC-insurance-in-force has grown significantly from $243.8 billion in 2004 to $557.1 billion in 2014.

Mortgage insurance is also available from private companies, Genworth Financial Canada (www.genworth.ca) and Canada Guaranty Mortgage Insurance Company (www.canadaguaranty.ca). 

Total Canadian private mortgage securitization outstanding represents a much smaller segment of the overall market and has declined from $23.68 billion in 2008 to $17.67 billion in 2013.5

8

Normally, the minimum down payment comes from the borrower's own resources and is treated as a traditional source of down payment. Traditional sources of down payment include:

[LIST 4 SOURCES OF * * * TRADITIONAL * * * DOWNPAYMENT]

ANSWER:

 

TRADITIONAL DOWN PAYMENT INCLUDE:

 

applicant's savings;

RRSP withdrawal;

funds borrowed against proven assets;

sweat equity (<50%) of minimum required equity, allow owner's labour on own property to count as equity);

land unencumbered

proceeds from sale of another property;

non-repayable gift from immediate relatives; or

equity grant (non-repayable from federal, provincial, or municipal agency).

9

What are non-traditional sources of down payment?

Non-traditional sources of down payment consist of any source that is arm's-length to and not tied to the purchase or sale of the property, such as borrowed funds, gifts, 100% sweat equity, and lender cash back incentives.

 

In these situations, the loan-to-value ratio will be 90.01% to 950/o and applies to 1-2 unit residential properties.

 

This option helps borrowers who have not saved a down payment, but have a proven track record of managing their debt and the financial capacity to repay the mortgage.

10

_ _ _ _ _  is an estimate of what a property is likely to sell for in an arm's-length transaction between a willing, informed, and rational average buyer and seller, if the property is on the market for a reasonable period of time when market conditions are unchanged. 

Market value of a property is an estimate of what a property is likely to sell for in an arm's-length transaction between a willing, informed, and rational average buyer and seller, if the property is on the market for a reasonable period of time when market conditions are unchanged. 

11

NOTE ONLY / LOAN-TO-VALUE

 

Lenders could greatly reduce their capital risk by setting very low loan-to-value ratios. However, they do not do this for two reasons:

 

1. Since lenders compete with each other to place mortgage funds, a loan-to-value ratio that is lower than the competitors' will drive lending activity to other lenders.

 

2. A low loan-to-value ratio may force the borrower to also seek junior financing, which is typically at a higher interest rate for a shorter amortization period, thereby increasing the risk of default.

NOTE ONLY / LOAN-TO-VALUE

 

Lenders could greatly reduce their capital risk by setting very low loan-to-value ratios. However, they do not do this for two reasons:

1. Since lenders compete with each other to place mortgage funds, a loan-to-value ratio that is lower than the competitors' will drive lending activity to other lenders.

2. A low loan-to-value ratio may force the borrower to also seek junior financing, which is typically at a higher interest rate for a shorter amortization period, thereby increasing the risk of default.

12

The ______ ratio is the percentage of your income needed to cover all of your debts. The debt ratio formula calculation is the same as that of the GDS, except all of your monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any loans.

Your TDS / TOTAL DEBT SERVICE RATIO is the percentage of your income needed to cover all of your debts. The debt ratio formula calculation is the same as that of the GDS, except all of your monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any loans.

13

NOTE ONLY / LTV & DEBT SERVICE

 

The lending value assigned to a given property and the loan-to-value ratio are used to calculate the maximum loan available on the basis of capital security. These two factors are chosen by the lender, subject to the statutory restrictions. This maximum is used only to define the amount justified by the security.

 

The lender will then turn to another measure, the debt service ratio, to determine the maximum loan which can be supported by the borrower's income. Once the maximum loan, as justified by the lending value of the property, and the maximum loan, as justified by the borrower's income, have been determined, the lender will choose the lower amount.​

NOTE ONLY / LTV & DEBT SERVICE

 

 

The lending value assigned to a given property and the loan-to-value ratio are used to calculate the maximum loan available on the basis of capital security. These two factors are chosen by the lender, subject to the statutory restrictions. This maximum is used only to define the amount justified by the security.

 

The lender will then turn to another measure, the debt service ratio, to determine the maximum loan which can be supported by the borrower's income. Once the maximum loan, as justified by the lending value of the property, and the maximum loan, as justified by the borrower's income, have been determined, the lender will choose the lower amount.​

14

NOTE ONLY / GDS

 

A gross debt service ratio of 30% (0.30) means that borrowers will be allowed to use no more than 30% of gross income to pay mortgage payments and real property taxes (and, possibly, heating costs, maintenance fees, or registered junior mortgage payments).

NOTE ONLY / GDS

 

A gross debt service ratio of 30% (0.30) means that borrowers will be allowed to use no more than 30% of gross income to pay mortgage payments and real property taxes (and, possibly, heating costs, maintenance fees, or registered junior mortgage payments).

15

Federally regulated financial institutions require mortgage insurance in order to make loans with loan-to-value ratios higher than _____ %

Federally regulated financial institutions require mortgage insurance in order to make loans with loan-to-value ratios higher than 80%

16

5 C's of Credit?

  1. Character Will the borrower repay the loan? This is a subjective opinion based on the borrower's current employment situation, educational background, business experience, length of time at current residence,
  2. Capital How much money will the borrower personally invest in the property (the down payment)? 
  3. Capacity Can the borrower repay the loan? This is a critical factor to review. Looking at a borrower's annual gross income and using lending constraints, such as debt service ratios, is necessary to determine capacity 
  4. Credit What is the borrower's credit/repayment history? Mortgage professionals should analyze a borrower's credit history by reviewing a credit report from a credit bureau (see Credit Analysis).
  5. Collateral What is the additional security for the loan in case a borrower is unable to repay it? In a residential real estate transaction, the real property is typically pledged as security for the loan 

17

How is a credit bureau requested?

Credit reports can be requested from two major bureaus in Canada, TransUnion Canada (www.transunion.ca) and Equifax (www.equifax.ca). 

18

How is a credit score determined?

Credit scores are based on a formula invented by Fair Isaac Corporation which focuses on previous payment history, current level of debt, number and frequency of new credit enquiries, and the type of credit the borrower has, e.g., credit card, mortgage loan, car loan, student loan, etc.

19

How can a borrower improve his/her credit score?

 In order to improve credit scores, borrowers should:

• make payments on time and at least the minimum payment every month;

• make full payments as soon as possible;

• not exceed credit limit on credit cards and try to keep balances below the limit; and

• reduce the number of credit applications/inquiries from potential lenders.

20

NOTE ONLY / CREDIT BUREAU SCORES

 

The scores range from 300 to 900 and a score in the high 600 range is generally considered as a good credit rating. A credit score of 750 or above would typically qualify a borrower for the best possible rate and terms.

 

The minimum credit score for a CMHC insured mortgage is 620 (there are limited exceptions for those who pose a low risk of default). If a credit report turns up with a BEACON/FICO/ EMPIRICA score of 0, it may mean that the applicant simply has no or very little credit.

NOTE ONLY / CREDIT BUREAU SCORES

 

The scores range from 300 to 900 and a score in the high 600 range is generally considered as a good credit rating. A credit score of 750 or above would typically qualify a borrower for the best possible rate and terms.

 

The minimum credit score for a CMHC insured mortgage is 620 (there are limited exceptions for those who pose a low risk of default). If a credit report turns up with a BEACON/FICO/ EMPIRICA score of 0, it may mean that the applicant simply has no or very little credit.

21

Define Total Debt Service?

The total debt service ratio is defined as the ratio of annual payments on all debts (first mortgage, property taxes, maintenance fees, additional financing, car payments, charge accounts, etc.) to annual gross income.

22

For owner-occupied single-family units, the maximum amortization period for loans with a loan-to-value ratio greater than 80%  is ___ years. 

For owner-occupied single-family units, the maximum amortization period for loans with a loan-to-value ratio greater than 80%  is 25 years.

23

Explain & discuss mortgage pre-approvals

When shopping for real estate, it is always an excellent idea for a prospective purchaser to obtain a pre-qualification certificate from the mortgage lender, regardless of how certain the borrower is that he or she will qualify for a mortgage.

 

A pre-approved mortgage calculates the maximum loan for which the borrower qualifies, based on the borrower's current financial situation and a satisfactory credit review.

 

A pre-approved mortgage also guarantees the borrower's interest rate for 60-120 days while the borrower looks for a property, even if the interest rate for the term selected goes up.