Alternative Lenders and Private Mortgages Practice Questions

Question 1 of 5

A self-employed buyer has been told they qualify for a 'stated income' or 'Business for Self' (BFS) mortgage program. What distinguishes these programs from conventional income verification?

• AStated income programs require no documentation at all, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount, and under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• BThese programs are only available from private lenders, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• CBFS programs offer lower interest rates to encourage entrepreneurship, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount, and under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• DBFS programs allow borrowers to state their income at a reasonable level without the same depth of tax return verification required by conventional programs — however, they still require: (1) proof of business existence (business licence, registration, HST registration), (2) typically a minimum 2-year business history, (3) a minimum credit score (usually 650+), (4) a higher down payment (often 20%+ to avoid CMHC insurance, as insured BFS programs have stricter requirements), and (5) the stated income must be reasonable for the business type — the lender uses industry benchmarks to validate the claim

Question 2 of 5

A client is considering a second mortgage from a private lender at 12% to fund a down payment on another property. What risks should the registrant highlight?

• AKey risks include: (1) the combined debt service of the first and second mortgages may create unsustainable TDS ratios, (2) the second mortgage lender has subordinate priority — in a foreclosure, the first mortgage is paid first, increasing risk for the second lender (hence the higher rate), (3) many first mortgage agreements prohibit or restrict second mortgages without lender consent, (4) the total leverage may leave the borrower with minimal equity and vulnerable to any property value decline, and (5) using borrowed funds for a down payment may constitute fraud if not disclosed to the primary lender
• BSecond mortgages carry no additional risk beyond the interest cost, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• CSecond mortgages are risk-free because the property value supports both, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• DPrivate second mortgages are illegal in Ontario, since private second mortgages are legal in Ontario, and they are regulated but not prohibited, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements

Question 3 of 5

Marcus is a licensed salesperson helping negotiate a VTB mortgage as part of a residential transaction. He drafts the VTB terms and includes them in the Agreement of Purchase and Sale. Under TRESA, what is the concern with Marcus's actions?

• AThere is no concern because drafting VTB terms is within the normal scope of a salesperson's duties when facilitating a real estate transaction
• BMarcus may be practising law without a licence by drafting mortgage terms, and should instead recommend that both parties retain independent legal counsel to prepare the VTB documentation
• CMarcus needs approval from his broker of record before any VTB can be included in a transaction, but once approved he can draft the terms himself
• DMarcus can only facilitate VTB transactions if he also holds a mortgage broker licence under the Mortgage Brokerages, Lenders and Administrators Act

Question 4 of 5

From a tax perspective, how is the interest income from a VTB mortgage treated for the seller in Ontario?

• AVTB interest income is tax-exempt because it is classified as a return of capital rather than investment income under the Income Tax Act
• BVTB interest income is taxable as regular income in the year it is received or accrued, reported on the seller's personal tax return, and taxed at their marginal rate
• CVTB interest income is taxed as a capital gain at a 50% inclusion rate because it is generated from the disposition of a capital property
• DVTB interest income is only taxable when the full mortgage principal has been repaid, allowing the seller to defer all tax obligations until the term expires

Question 5 of 5

A buyer cannot qualify for a traditional mortgage due to poor credit and approaches a private lender offering a 1-year term at 10% interest plus a 2% lender fee. On a $300,000 mortgage, what is the total first-year cost of this financing?

• A$30,000 — interest only — but in practice, accounts for interest but omits the 2% lender fee, which is a significant upfront cost, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount
• B$12,000 — the lender fee only, since the lender fee is only one component, and the interest cost of $30,000 is the larger expense, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• C$36,000 — interest of $30,000 ($300,000 x 10%) plus the lender fee of $6,000 ($300,000 x 2%); this represents a 12% effective first-year cost, dramatically higher than conventional mortgage rates, which underscores why private lending should be a short-term bridge strategy, not a long-term financing solution
• D$32,000 — interest plus a flat administrative fee, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements