Qualifying Clients and the Stress Test Practice Questions

Question 1 of 5

A buyer completed their pre-approval process and received conditional approval for $500,000. They signed a firm offer on a property for $485,000. The lender then orders a final review. What additional steps occur between the pre-approval and the firm (final) approval?

• AThe firm approval process includes: (1) property appraisal — the lender confirms the property value supports the mortgage amount, (2) title search — confirming clear title and no encumbrances, (3) updated employment verification — confirming the buyer is still employed at the stated income, (4) updated credit check — ensuring no new debts or credit issues since the pre-approval, (5) review of the purchase agreement for any concerning conditions or terms, (6) property insurance confirmation — proof of adequate insurance, and (7) if the property or buyer's situation has changed materially, the approval may be denied or modified
• BNo additional steps — the pre-approval is the final approval
• COnly a property appraisal is needed for firm approval, and real estate
• DFirm approval is automatic once a purchase agreement is signed, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate

Question 2 of 5

A self-employed buyer who operates a cash-intensive business (restaurant) is having difficulty proving their income through traditional documentation. What red flags might a lender identify, and what legitimate solutions exist?

• ACash businesses cannot obtain mortgages real estate
• BLenders do not investigate the source of income for mortgages real estate
• CRed flags include: (1) declared income significantly below industry benchmarks for the business type and size, (2) bank deposits that substantially exceed declared income, (3) inconsistencies between declared income and lifestyle/assets; legitimate solutions include: (a) working with an accountant to ensure tax returns accurately reflect income, (b) maintaining thorough business records and POS systems, (c) building a 2-year track record of consistent, accurately declared income, (d) using a BFS program with a higher down payment, and (e) providing supplementary documentation (financial statements, bank statements, contracts)
• DThe buyer should overstate income on the mortgage application to qualify, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate

Question 3 of 5

A buyer is purchasing a property with a rental suite. The rental income is $1,500/month. How does rental income affect GDS and TDS calculations?

• ALenders typically apply a rental offset — using 50-80% of the rental income to offset housing costs in the GDS/TDS calculations; the offset percentage varies by lender (CMHC uses 50% of gross rental for owner-occupied properties with a rental suite); this means $750-$1,200/month is credited against housing costs, improving the buyer's ratios but not by the full rental amount
• BRental income is added directly to the buyer's employment income
• CRental income cannot be used for mortgage qualification
• D100% of rental income replaces the buyer's employment income requirement

Question 4 of 5

A buyer received a mortgage pre-approval letter from their bank 3 months ago. They have since changed jobs and taken on a $25,000 car loan. Is their pre-approval still valid?

• AYes — pre-approvals are guaranteed for 120 days regardless of changes, especially where the borrower's income, credit profile, and debt ratios meet the standard qualification criteria applied by institutional lenders for this type of property
• BOnly the car loan affects the pre-approval, not the job change, given that the mortgage terms including rate, amortization period, and prepayment provisions are consistent with the borrower's financial objectives and risk tolerance
• CThe pre-approval is permanent once issued, given that the mortgage terms including rate, amortization period, and prepayment provisions are consistent with the borrower's financial objectives and risk tolerance
• DThe pre-approval may no longer be valid — pre-approvals are conditional on the borrower's financial situation remaining substantially unchanged; the job change may affect income stability and employment verification, while the new car loan increases TDS ratios and reduces borrowing capacity; the buyer should notify their mortgage professional immediately and obtain an updated pre-approval before making offers

Question 5 of 5

A buyer asks why the stress test applies even though they have a 35% down payment and are not seeking mortgage insurance. They argue the stress test should only apply to high-ratio (insured) mortgages. Are they correct?

• ANo — since January 2018, the B-20 stress test applies to all federally regulated mortgage lending, including conventional (uninsured) mortgages with 20% or more down payment; OSFI extended the stress test to conventional mortgages to ensure all borrowers at federally regulated institutions demonstrate resilience to interest rate increases
• BYes — the stress test only applies to high-ratio insured mortgages, given that prior to 2018, the stress test applied only to insured mortgages, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• CThe stress test was eliminated in 2023, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• DThe stress test only applies to first-time buyers, 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