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Practice of Mortgage Brokerage:
Session 3
Ways to validate a referral - Answer 1. Use a 'Thank you' to start a conversation
- Defer meeting and search up info about them
- Use a directory
- Check licensing or trade associations (to see if the person is qualified in what they do)
- Use intuition and judgement to see the potential of a reference source Making Referrals - Answer There are a few steps to do this:
- Verify Authenticity of the person you will be making a referral to. Like if they are licensed and qualified
- Obtain consent from your client to release their contact info to the person you're referring them to
- Maintain confidentiality of the client, like if the realtor asks for updates, don't give them full details.
- Administration fees must be paid through brokerage Building Rapport - Answer Developing a comfort level between you and the applicant, as discussing finances may feel somewhat intimidating for an applicant. Developing Rapport - Answer -Making good first impressions -Introducing yourself and starting a dialogue, you can do this by asking who/what/where questions, and by showing professionalism, creating common ground etc -Steering the conversation, use open ended questions, make sure to weave professionalism in. Get disclosure forms signed -Being aware of non-verbal clues. Watch out for red flags, these include evasion, nervous laughter, unable to answer reasonable questions, rehearsed answers etc Minimum requirements for verifying identity of applicant - Answer 1. Obtain the applicant's full name (first, middle, and last).
- Record the type, serial number, and expiry date of two pieces of government-issued identification (ID). At least one should include a photo.
- Check that the applicant's name, address, and telephone number appear in the telephone book or a credible electronic directory.
- If possible, set up a time for a personal meeting.
- Tell applicant to bring two pieces of government issued ID. At that time, you will need to verify that the ID is not expired and that the ID matches the applicant.
- Explain to the applicant that other documentation will be required as the process moves forward. What Documents to collect - Answer 1. Applicant identification documents: like ID, SIN etc
- Proof of income and employment: Paystubs, T4 etc
- Proof of down payment: Proof of savings, of existing equity/mortgage
- Property documents: Purchase agreement, MLS, leases/rental agreements A credit score is based on... - Answer 10% New Credit 10% Types of credit 15% Length of credit history 30% Amount owed 35% Payment History [Side note: a conventional mortgage requires a score of 650 or more] How to Address poor credit - Answer - Ask for proof of cause: can they provide explanations or proof of cause for the trouble spots?.
- Ask for documentation to refute: any documentation that refutes or disproves the creditor information from the reporting agency.
- Investigate other credit inquiries: check what other credit-granting companies, brokers, collection agencies, or government agencies have done a credit inquiry recently (which may be an indication of hidden current or pending debt).
- Look closer at the property: take a closer look at the property that the applicant owns or wants to own. The property must be valuable enough to offset the poor credit
- Verifying property documents is described in detail in
- Consider alternative sources of funding right away so that you have a solution
- Prepare the applicant: if there is no lending solution for this applicant, be honest about it. It is better to discuss it right away rather than spending time and effort on a deal that will not succeed. 'Decision Chair' - Answer Supported by 4 things (legs), weakness in one area may cause collapse. Made up of Income, Equity, Credit, Property. Legal timing of Cost of Disclosure - Answer This disclosure must be done at least 2 business days BEFORE: The day the borrower:
- makes a payment
- enters into a mortgage agreement
- incurs any obligation in relation to the mortgage If information in a disclosure form is incorrect... - Answer The borrower may be able to cancel the agreement and receive money from statuary damages.
- provisions for the termination of the agreement Using a written service agreement.. - Answer To: -service relationship -collection and use of personal and confidential information -future marketing communication -consent to obtain credit reports -possible product offerings -mortgage associate (or brokerage) duties to borrower and lender for the specified service relationship -how you (or the brokerage) will be paid -whether you (or the brokerage) charge any fees for services -whether the applicant is responsible for any additional -costs related to the mortgage transaction process You MUST disclose in written... - Answer 1. How you (or the brokerage) will be compensated
- the nature of any other monies or benefits that you may receive
- any factors that may influence the payment of those monies or benefits
- any additional fees that are payable by the applicant Possible material risks.. - Answer 1. Becoming 'house poor', where borrower has limited money for anything other than mortgage
- Other costs than just the purchase price of the home
- Mortgage payments may increase due to change in interest rate
- Mortgage may not be renewable at maturity
- Penalties that may arise from things like payouts
- Value of home may be affected by economic climate
- Condo purchases may be at risk if the condo corp. runs out of funds Ways to reduce material risk - Answer 1. Mortgage life insurance
- Owner title insurance
- Seeking independent legal advice Cost of credit disclosure required for every deal? - Answer No, not required if there is no fee charged or when the lender in the transaction is not an individual or corporate entity engaged in the business of making loans secured with mortgages (or the lender requests that you supply this disclosure). However when it is needed, it can be disclosed when closing costs can be accurately estimated. Cost of disclosure document - Answer Includes:
- all of the costs incurred during the arrangement of the mortgage (referred to as the total cost of credit or TCC)
- the interest rate that the applicant will pay after the total cost of credit is factored into the loan amount(referred to as the annual percentage rate or APR)
Loan file/ Mortgage loan file - Answer Refers to all of the consent forms, disclosures, notes, explanations, and any other supporting documentation for the file. Who's and Whats of maintaining a loan file - Answer All loan files have to be retained by the brokerage, even if transaction was cancelled or not approved. These may be stored either physically or online. At the end of each deal, turn over all the documents to the brokerage. Destroy any copies on your personal computer if the brokerage requires it. Personal information privacy - Answer Personal information protection act (PIPEDA) for federal level. And Personal Information Protection Act of Alberta (PIPA) for provincial protection. And under the Alberta Real Estate Act Rules. A loan file must be kept for a minimum of... - Answer 3 years Who is responsible for verifying identity of applicant? - Answer Ultimately it is the lender who is responsible, but where they cannot meet face to face with borrower, they get the mortgage broker to do it for them or another third party person, like lawyer. Primary sources of identification - Answer Need at least two of these, at least one (or both) with a picture ID on it. These also must be original documents and not expired. Examples include: -Canadian passport -Canadian citizenship card -Canadian permanent resident card -Canadian Social Insurance Number card -provincial driver's licence -provincial health card -provincial or territorial government identification cards (GIC) -birth certificate Secondary sources of identification - Answer Used if primary identification don't have current address. Include credit card statements with the related valid card, bank statements, tax notices, utility bills, insurance policy, most recent NOA etc. Acceptance sources of income - Answer Include: -> Traditional employment income: permanent full time or part time -> Employment related income: OT, commissions, bonuses (these need a two year history), employment insurance, pension income -> Self employment or business income: sole proprietors, corps, partnerships, people 25% share in a business, people paid on 100% commission -> Non employment income: alimony, child support, disability, trust income, etc. Traditional Proof of income documents - Answer - Letters of employment
- Pay stubs, net pay direct deposit receipts
T/F In a corporation, one person cannot be held liable for any debts, obligations or acts unless they sign a personal covenant - Answer True How to prove income for a self employed borrower - Answer ~T4 may only be available for some people, no T4 is used if borrower is owner of corp. ~CRA NOA can be used to prove self employment, but only if borrower is not writing off too many expenses. Invoices and bank statements, can be used together to verify income. ~Contracts and business agreements can be good for verifying sources of income. ~Bookkeeping record can be used as they keep track of transaction such as sales or purchases ~Financial statements are formal records of incorporated businesses, these have income statements and balance sheets. Financial statements - Answer Consist of income statements and balance sheets. Income statements tell lenders where the revenue of the business come from, and whether there is any revenue left over. They provide a summary of profits and losses that the company had. Balance sheets accompany the income statements and list assets and liabilities of the business as well as the equity of the owners. assets must balance out the liabilities of the business. Alimony can be verified in... - Answer Annual T1 general income tax returns, CRA NOA, bank statements, divorce decree separation agreement or court order or custody agreement, and T1198 form. Disability income can be verified in... - Answer Benefits statement or letter from provider, bank statements, and CPP disability program. Trust income can be verified in... - Answer Can be acceptable to lender if the trust is irrevocable, a minimum of 24 month history of receipt, and there is verification of sufficient trust assets composition and income. Statement from trustee, copy of trust agreement, Annual T1 general income tax returns, and T3 slip Investment income can be verified in... - Answer Annual T1 General Income Tax Returns, T5 slip, T3 slip, T5013 slip, and T5013A slip Rental Income can be verified in... - Answer Financial statements, T1 General income tax return, Lease agreements, mortgage statements, title search, conformation of property tax paid, and condo fee schedule if property is a condo Mortgage is insured at - Answer more than 80% LTV Acceptable sources of down payment are - Answer ~Personal savings ~Gifts/inheritance
~Sale of assets or investments ~Borrowing against assets (like equity from existing property) ~Sweat equity ~Rent equity If DP comes from more than one source, then a summary must be provided Gifted downpayment funds cannot be used by... - Answer New to Canada borrowers and self employed borrowers unless they qualify for a conventional loan by themselves. Cashing RRSPs through home buyers plan - Answer Eligible home buyers can cash up to 25,000 dollars for the purchase of a home for them or a disabled relative. An eligible home owner is:
- someone who is purchasing a first home to live in him/herself (i.e. to be principal residence or owner-occupied); or
- someone who currently owns rental or investment property in which s/he does not live; or
- someone who has not owned a principal residence property in the five years prior to applying for the plan. Other conditions are that they must be a Canadian resident, must be owner of the RRSP, and can only use unlocked funds that have been in there for more than 90 days. Red flags on documents include... - Answer ~Round dollar amounts. Balances seldom calculate to round dollar amounts. ~Misplaced dollar signs, commas, etc. ~Misaligned data in columns. Computer-generated and printed statements seldom misalign data. ~Incorrect balances and other calculation mistakes. ~Date sequencing. Out-of-sequence dates are a strong indication of a forged or altered document. Sweat equity - Answer Using physical Labour in lieu of cash for a down payment, only a few lenders accept this. Like by installing things in the home themselves if the borrower was a contractor. It can be used up to half of a down payment, so of the DP was 80, then 40,000 worth of work could be used. Sweat Equity Documentation - Answer ~if the house is a new build - a construction agreement with the builder in which the sweat equity is clearly referenced and outlined ~if the house is a rent-to-own- a current rental/lease agreement with an addendum stating what sweat equity is being done. NOTE: Verifying a rent-to-own agreement includes verifying the lease agreement and purchase contract. ~invoices or quotes from subcontractors and/or for building materials ~any separate contracts that outlinethe details of the sweat equity ~calculations as to how much the sweat equity is worth Other sources of equity that can be sold for cash - Answer ~Life insurance policy ~owned vehicles
500-574 is poor credit 575-649 is average credit 650-749 is good credit 750-900 is very good credit Validation odds - Answer Statistical percentage of the general population within a particular credit score and who will likely go over 90 or more days past due within the next 24 months on credit cards or loan amounts Three names for credit scores - Answer BEACON (Equifax), FICO, and Empirica Lender underwriting for no/zero credit - Answer Applicants seen as high risk as history cannot be checked, require a min. 15% DP that must be from the applicants own savings. ES - Answer Current employment (Employment subject) EF - Answer Employment former E2 - Answer Employment, second former EC - Answer Employment co-subject, such as a spouse. Secured loan - Answer secured loan by an individual's personal property as collateral and been registered with the provincial government, in accordance with the Personal Securities Act. Secured loans may be chattel mortgages, registered loans, or registered liens. It is not a negative representation of the credit holder, it may or may not appear on the credit file. Depends on province Judgements - Answer Credit related court order that instructs the credit holder to pay money it owes to a creditor. It means that the borrower has been sued, and this will remain on file for 6 years. Trade lines/lines of trades - Answer Open credit accounts such as credit cards, car loans, home mortgages End of report symbol - Answer The end of the report should have an ampersand (&), if it is not there you do not have the full report Evaluating applicant credit worthiness - Answer ~Character and Credit: whether or not the applicant is willing to pay back debt, the credit status shows how well they managed money in the past ~Capacity: the ability of an applicant to pay back his/her debts
~Capital and collateral: capital is the amount of money an applicant has, and collateral is properties and assets and how much they can be sold for. 5 C's of Credit - Answer Character, Capacity, Credit, Collateral, Conditions Assessed value vs Market value vs Appraised value - Answer Assessed value of the is based on mass appraisal and is used for property taxes. Market values however changes frequently due to changing levels of supply and demand; a probable price. Appraised value is used for many purposes such as for taxes as well or financing needs, or probable selling price. Deal breakers - Answer 1. If it is a private sale make sure the lender will consider it
- Verify that the property actually exists in that location
- Verify that property is actually owned by the person identified in the letter
- Verify that there are no liens or legal impediments against the property Facts discouraging Lender - Answer 1. Square footage and location; some lenders have a min SQ for financing, and some only lend in specific areas
- Zoning; Any potential or current zoning laws that may impact the property, you can get this directly from the municipality or a real estate lawyer
- Acreages might not be financed by all lenders
- Hobby farms Real estate appraisers - Answer Licensed through RECA and regulated under the Real estate act. They must act independently, objectively, and unbiased. They must follow either of 3 codes of standard: Canadian Uniform standards of Professional appraisal practice (CUSPAP), OR International Valuation standards OR Uniform standards of Professional Appraisal Practice (USPAP) Recognized appraisal associations - Answer The real estate act of Alberta recognizes three professional appraisal associations. ~Appraisal institute of Canada (AIC) -Canadian instate of real estate appraiser (CNAREA) -Alberta assessors associations While there are more, these are ones recognized by the act Principle of substitution - Answer when buyers are presented with several similar, equally desirable properties, they will choose the lowest priced option Property assessor - Answer A property assessor typically works for a municipal government performs valuations that apply to entire neighbourhoods rather than individual properties which establishes value for the purposes of taxation
- some aspects of standard deal documentation may be unavailable or difficult to verify the applicant will typically have a higher level of equity in the property Monoline/near prime lenders deal with applicants who... - Answer 1. the applicant may have some past credit problems or may have somewhat higher debt ratios than a prime lender would accept
- the applicant may have a suitable level of stated income but may lack the standard supporting documentation (e.g. someone who is self-employed)
- the property may or may not be of slightly substandard quality
- some aspects of the deal documentation may not match the standard requirements Prime lenders deal with applicants who... - Answer 1. the applicant qualifies well (that is, has suitable income and acceptable debt loads)
- the applicant has a clean credit history
- the property qualifies well (and is probably a standard, owner-occupied, city home)
- all supporting information is verifiable Private lenders deal with applicants who... - Answer 1. applicants who need a second mortgage to pay off or consolidate debt
- applicants who need to "repair" their credit rating after a bankruptcy or other financial problem (for example, by refinancing or taking out equity in their property to pay bills or debts)
- applicants facing foreclosure
- applicants who are temporarily out of work and need money to keep up their mortgage payments until they find a new job
- applicants who need financing for a reasonable but unusual deal that a more conventional lender would not consider (for example short-term financing for a small builder) Efficiency Ratio/ Funding Ratio - Answer the ratio of deals submitted to deals closed/funded. Most prime lenders prefer this to be at-least 70% T/F The mortgage broker has no direct relationship with the insurer - Answer Treu Risking - Answer Process taken to assess the applicants risk level (how likely they are to default). Softwares used for this Emili (CMHC), Excel (Genworth Financial), and Vantage (Canada Guaranty). This software compared the information in the submitted loan file to historical info and other info such as the property value and others in the neighbourhood, employment trends, equity positions, qualifying details etc. Automated Risking benefits - Answer ~ Faster turnaround times (from days into minutes) ~ Risk assessment is consistent and predictable ~ '24/7' automation allows underwriters to concentrate on other work
Restricted license - Answer insurance licence that permits you to offer—but not sell— insurance products. In other words, it allows you to present the option to purchase mortgage life insurance. you can only offer this from one insurance company. Brokerages typically purchase one license. two types of title insurance - Answer Loan policies which protect lenders against title related losses, and owner policies which protect borrowers against title related losses. Gap coverage - Answer required when a real estate transaction is scheduled to close before the land titles office has registered the applicant's name on the title. In this case, the loan policy protects against the possibility that a name other than the applicant's might be entered onto the title during the time gap between when the deal closes and when the title document is officially updated. T/F Builder coverage is another name for a new home warranty - Answer False, builder coverage is for small things like chipped tiles, broken drywall, while a new home warranty is for bigger defects in structure. Matching lenders and borrowing can be done by.. - Answer ~match by applicant and lender type; like sub prime lenders to sub prime applicants ~match by lender criteria; compare underwriting guidelines to risk ~match by applicant priority; how fast the applicant needs funding, what rates are etc. ~match by property type (security); like some lenders may not mortgage an older home, or a mobile home ~match by mortgage product; what best fits the needs of the applicant Mandatory disclosure documents - Answer 1. Consent form to obtain consumer credit history (mandatory)
- Mortgage Borrower Relationship Disclosure (mandatory)
- Mortgage Borrower Compensation Disclosure (mandatory)
- Cost of Credit Disclosure (if required by circumstances where the lender or brokerage charges fees) disclosed BOTH VERBALLY AND WRITING; also referred to as the Fair Trading Act (FTA) or "Annual Percentage Rate [APR] Disclosure" document ~ All of these must be discussed with applicant over the course of the file If brokerage fees are being charged: - Answer 1. Determine the closing costs.
- Calculate the total cost of credit (details later in this session).
- Calculate the annual percentage rate (details later in this session).
- Present the applicant with the Cost of Credit Disclosure document.You can download an APR disclosure program from the AMBA website to generate a form. Or if your brokerage uses the D+H Expert software, you can produce a Cost of Credit Disclosure form from that program. See the two learning activities below.
- Allow the applicant a 48-hour "cooling-off period" to consider the information before signing. The applicant can back out of the agreement without penalties or charges
Finders fees - Answer one-time, lump-sum payments from lenders to brokerages based on loan amount and term length. The larger the loan amount and the longer the term, the higher the finder's fee. The brokerage typically splits the finder's fee with the broker or associate based on his or her employment / compensation agreement with the brokerage. (bps) Trailer fees - Answer based on a model by which an individual receives a smaller lump- sum finder's fee at the time a deal closes but receives a small recurring fee or annuity on the anniversary date of the deal for the lifetime of the loan. Usually offered by mortgage banker or 'broker friendly' lenders rather than conventional lenders. Volume bonuses - Answer mainly offered at the brokerage level (sometimes called the aggregate volume model), in which case an individual at a brokerage is compensated based on the company's efforts as a whole as well as his or her own. Some lenders also offer volume bonuses at the individual broker/mortgage associate level. Value bonuses - Answer related to your efficiency rating or funding ratio. With this model of compensation, an individual is paid based on the number of deals closed approved per number of deals submitted to a particular lender. Commission based models of compensation - Answer ~referral fees ~brokerage fees ~finder's fees (up-front fees) ~trailer fees ~volume bonus ~value bonus/efficiency or funding-ratio bonus ~lender incentives ~Rate discount Basis points (beeps) - Answer The general "unit" of compensation for mortgage brokers and associates is the basis point (abbreviated as bp and pronounced as "beep"). Compensation basis points per deal are pre-set by lenders and are non-negotiable. There are 100 basis points in 1%, so 1 bp = 1/100 of 1%. Soft marketing techniques - Answer 1. customer surveys
- close-out packages; a collection of letters or documents that thank a client for working with them. Can be as simple as a thank you card, and other may be information for things like warranties, or services.
- asking for referrals Types of small businesses - Answer 1. Sole proprietorship: a business owned by one person. It is the least expensive to start and operate, and can give taxation benefits, however the business owner and proprietary are the same entity, so the owner is open to liabilities like debts or losses.
- Incorporated business: where owner and company are separate so there the owner is not held personally responsible for liabilities. It also improves business credibility.
However there are more paperwork, initial costs to register, and no personal tax credits as funds must be kept separate from personal.
- Partnership: One of several different types of partnerships where two or more people own a business, and have a specific liability arrangements. However this liability split is more complicated, and this partnership can be messy to dissolve. But benefits are that there is taxation benefits, and works well when partners have complementary talents. SMART Method for business - Answer SPECIFIC- Make the goal concise and well defined so that it would be clear to someone else. MEASURABLE - Check that it is possible to know (measure) when the goal has been achieved. ATTAINABLE - Make sure the goal is something that is actually achievable. RELEVANT - Make sure the goal applies directly to your business and what you are trying to accomplish overall. TIME BOUND - Include a realistic time-frame for completion of the goal. CRM (Customer Relationship Management) - Answer a business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty among the firm's most valued customers. A good CRM program can store:
- collect, store, and manage client-related documents
- build stronger relationships with potential clients by 3. providing relevant educational materials and marketing
- build stronger relationships with applicants and/or lenders by providing reminders about transaction-related details such as mortgage renewal dates or acknowledgements of personal details such as an anniversary of some kind, the birth of an expected baby, etc.
- build detailed client profiles, including mortgage history, campaign responses, web activity, and demographics
- analyze existing client information to segment and target future business opportunities
- record information about referrals and other potential business opportunities, and track related interactions
- support regular contact with clients and potential clients through web, phone, e-mail, and direct mail campaigns Information to collect for a CRM Program - Answer ~ The clients occupation, hobbies, spouse and children names, anything to further personalize the relationship ~ Record some details about the mortgage transaction, to contact them for things like renewal ~ Note the clients goals and timelines so you can send them relevant materials ~ Make sure you have complete info in case you receive a referral 4 Basic types market types/segments - Answer Geographic, demographic, psychographic, and behavioural
