| The first stage of the mortgage lending process involves filling out the application, verifying the information on this application, and confirming the value of the property. The process of determining the risk of an application, and whether to approve it, is called underwriting.
The underwriter considers three primary components of each application. The task of underwriting is to determine the borrowers ability to repay the funds under the agreed upon terms, their willingness to repay, and the adequacy of the real property as security for the mortgage loan.
1. The current financial position of the applicant.
Net Worth:
The applicants net worth is determined to decide their overall financial well being. Of particular concern is the verification of available net worth for the purpose of down payment. The accumulation of assets beyond liabilities can be used as a general test of the applicants personal finances and income management in prior years.
Gross Income:
One of the most important components of the loan underwriting process is determining the borrower’s gross income. The income of all borrowers and co-borrowers is included in the calculation. The income can be derived from several sources, but it must be supported by historical documentation and have a high likelihood of continuation in the future. The underwriter is concerned with the quantity of income earned in order to determine the maximum mortgage allowable, and also the durability of these earnings to insure that the borrower will be able to make their mortgage payments for the full term of the mortgage.
The following outlines the types of income that may qualify as well as the verifications required to confirm them:
Salary:
Income derived from any kind of salary, whether monthly, weekly or hourly is acceptable. Two or three years employment history is usually required.
Commission and bonus:
Commissions and bonuses may be qualifying income if it is an ongoing and persistent component of overall earnings. To verify this the underwriter will average the last two or three years of income shown on your income tax returns and the year-to-date earnings from the written verification of employment or pay stubs. The task if to determine if this income is likely to continue in the future, and at what levels given the employment type.
Self-employment income:
Generally, the underwriter will average the income earned through self-employment for the last three years from the applicant’s income tax returns and the year-to-date earnings from a profit and loss statement of the business. Self employment can take many different forms so the underwriter will require as much supporting evidence as possible to determine and verify qualifying income. In determining the current amount of qualifying income generated by self employment the underwriter will take into consideration the trends in your business or industry in an effort to forecast future prospects.
Other Income:
Income earned from rental properties, interest, dividends, pensions, and social security can be used, as long as it can be verified and will persist long into the future. Some incomes are discounted, or do not qualify at all, for the purposes of mortgage loan application. One time gifts or windfalls are not income nor is occasional overtime or a single bonus from your employer if it is not likely to be received again. In general, unemployment benefits or other insurance’s with a finite disbursement period are not considered.
Funds to Close:
When the proposed loan is being used to finance the purchase of a home, the lender will determine the source of funds for the down payment as well as closing costs. The mortgage lender is verifying that closing costs and down payment amounts are not also going to be borrowed and have been accumulated over time from the borrowers own resources.
The following are acceptable sources of funds for closing:
Funds on deposit:
Money that has been on deposit for at least 60 days in checking or savings accounts at any depository institution or investment company is acceptable, so long as it can be verified on bank statements for the past two months.
Stocks, Bonds, Mutual Funds, etc.:
Cash equivalent investments are acceptable forms of funds. They can be validated through statements from investment companies for the last two months.
Sale of existing property:
Many times the source of funds for the down payment on a home comes from the equity in a property that will be sold. The sales price of the property being sold is indicated on the loan application and any existing loan is verified on the credit report or through a verification of previous mortgage. The contracts of purchase and sale must be submitted to the mortgage lender in order to verify that the proceeds of disposition are sufficient and closing dates are in order.
Gifts from family members:
Gifts from family members for the down payment and/or closing costs are acceptable so long as there is no requirement for repayment. CMHC will require the execution of a gift letter as proof that the gift is bona fide.
CMHC requires the borrower to demonstrate their ability to cover closing costs in the amount of 1.5% of the value of the property. Closing costs can be equal to as high as 3% of the value of the property being purchased and can vary widely depending on the property being purchased, services required, taxes and insurance’s applicable, whether the home is new or old, closing dates affecting interest adjustments, and the balances of any prepaid expenses.
Closing cost are typically one time fees that must be paid as a result of the purchase transaction. Other immediate costs are also incurred as a result of a home purchase. These include moving costs, costs to ready the home for your family, insurance coverage, lock smith and security costs, renovation costs, household affects such as drapes, appliances, and furnishings, and the installation of telephone - cable and internet access etc. |
