MATH CLASS 6

GOBC Real Estate • Mortgage Notes

• LTV% (LOAN TO VALUE RATIO)
• GDS%
• DCR
• STRESS TEST

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 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
MATH 6 – Mortgage Qualification
HINTS: These questions will have DCR, LTV%, GDS%, LV, Income and Net Operating Income in them
and will usually ask you to find the maximum allowable loan given or to find the maximum funds
advanced to a lender.

In order to determine your ability to qualify for personal (residential) or commercial (business)
mortgages, the lender will consider two constraints (criteria/limits that are used to make decisions):

1. Income constraint – based on GDS for residential and DCR for commercial
2. Property constraint – based on lending value of the property

The reason that the bank examines these constraints is to weigh the risk in giving mortgage money
versus the interest return on the mortgage money given. IT IS ALL ABOUT RISK vs REWARD!!

The lender will ALWAYS consider BOTH constraints.

The lender will ALWAYS grant a mortgage based on the LOWEST constraint.
LTV
%
,
less risk
lower

80=100 ✗ 80% Always looking

70% to lesser
70=100 ✗ give
amount
60=100 60%
.

4
lover GPS't risk
lower
,

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 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
Residential: Commercial:

1) M = LV x LTV% <------ same ------> 1) M = LV x LTV%

2) Pmt = I x GDS% - Tax 2) Pmt = NOI ÷ DCR

Pmt = Payment LV = Lending Value

Tax = Property tax LTV% = Loan-To-Value Ratio
GDS% = Gross Debt Service Ratio M = Mortgage amt (same as PV)
DCR = Debt Coverage Ratio NOI = Net Operating Income

FOUR steps:
1) Find M using M = LV x LTV% – ALWAYS start with this formula
***if this does NOT produce the lowest answer in the list, then go to step 2

2) Find Pmt using either Pmt = I x GDS% - Tax OR Pmt = I / DCR

3) Find PV – Use Pmt found in step 2

4) Compare M (from step 1) and PV (from step 3) and choose the lowest answer
The lender will ALWAYS grant a mortgage based on the LOWEST constraint.
*** even though the questions ask “what is the maximum amount” !!!

Rearranging formulas – two rules to UNDO math actions (operators) in a formula:

1. Move items with subtraction (–) and addition (+)
2. Move items with multiplication (x) and division (÷)

When you move something from one side to the other – you must change the action!
Subtraction becomes addition Addition becomes subtraction
Multiplication becomes division Division becomes multiplication

Example – if they wanted you to find the GDS% (instead of finding Pmt):

Pmt = I x GDS% – tax ----> 1. Move tax with the action (the subtraction)!

Pmt + tax = I x GDS% ----> 2. Move I with the action (the multiplication)

Pmt + tax = GDS% ----> Rearranged!

I

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 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
Residential (both constraints):
1. Jonathan Wong has offered $231,000 for a house, providing he is able to obtain acceptable financing. The house
lists for $242,000, but the lender has set the lending value at $238,000. The lender requires a loan-to- value ratio of
80% and a gross debt service ratio of 30%. Property taxes are $1,750 per year and Mr. Wong's annual gross
income is $65,000.

If the interest rate is 6.5% per annum, compounded annually, the amortization period is 20 years, and payments
are made monthly, what is the maximum amount this lender will advance, rounded to the nearest $100?

(1) $201,300 (2) $196,800 (3) $215,200 (4) $190,400

N zottw J .
= 6.5 1. M = LV x LTV%

✗
IYR Pmt = 12
=
238000 ✗ 80%
PV 201339.32 6.5 m= 190,400.00
PMT 1479,171 I 2. Pmt = I x GDS% - Tax
___

FV OI I 30%-1750 /yr
=
65000hr ✗

#PYR✗
¥501411479.100
=

2. Jake Touche wants to purchase a house that is listed for $276,000. The bank's appraiser estimates that the
lending value of the property is $275,000. Jake's gross annual income is approx. $50,000 per year. The bank applies
an 80% loan-to-value ratio and a gross debt service ratio of 32%. Property taxes amount to $1,800 per year.
Assume that the lender demands a 25-year amortization period and monthly payments at j2 = 5%. How much can
Jake borrow, rounded to the nearest $10?

(1) $220,000 (2) $195,600 (3) $216,360 (4) $203,460

N 25 # N J = 5 1. M = LV x LTV%
z

/
IYR Pmt = 12

= 275,000 ✗ 80%
PV 203459 ,
40-17203,400
= 220 006
PMT 11833.33=1 5 2. Pmt = I x -
GDS% - Tax

y°±
FV
1-2 = 500004×32%-1800 /yr
#PYR
©2021 GOBC Training LTD PMT 82

142¥
__
-_
1183.33
 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
3. A young executive has applied to her bank for a mortgage loan to enable her to purchase a house. Her income is
$55,000 per year. The bank informs her that they will apply a 32% gross debt service ratio when calculating her
maximum loan, and that current mortgage rates are 7% per annum, compounded semi- annually for 20-year
amortization mortgages. Given that annual property taxes are $2,000 and mortgage payments are to be made
monthly, what is the maximum mortgage loan the bank will grant?

(1) $168,982.46 (2) $183,932.97 (3) $163,246.79 (4) $200,937.47

N 20# N J = 7 1. M = LV x LTV%
z

✗
IYR Pmt = 12

PV 108982.46
7
PMT 1300 I 2. Pmt = I x GDS% - Tax
-

FV OI
I 55000hr ✗ 32¥ 200°
C
-

A
#PYR

156%-00=1300.00
-
=

Commercial (both constraints):

4. What will be the maximum loan granted on a commercial building with a lending value of $3,250,000 and
yielding a net operating income of $360,000 per year, where the lender requires a debt coverage ratio of 1.2 and an
80% loan-to-value ratio. The loan will be amortized over 25 years with annual payments and the interest rate is
13% per annum, compounded annually.

(1) $ 2,437,500.00 (2) $ 2,700,000.00 (3) $ 2,107,425.47 (4) $ 2,198,995.49

N 25×1 J = 13 1. M = LV x LTV%
,

IYR 13 Pmt = 1

3250000 ✗ 80%
198,995.49
-

PV 2
= 2600 ooo

PMT 3000001 2. Pmt= I ÷ DCR

-0L

FV OI

#PYR I 30,9-0200=3000001 .yr

©2021 GOBC Training LTD 83
 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
5. A borrower approaches Ripley Finance Company about a mortgage on an income-producing property. The
property produces an annual net operating income of $112,500. The lending value of the property is $880,000.
Ripley will only lend to a maximum of 75% loan-to-value ratio, and requires a minimum debt coverage ratio of
1.125. Ripley's terms are: j12 = 12%, a term and amortization period of 15 years, and monthly payments. Given
these constraints, calculate the maximum allowable loan (rounded to the nearest dollar).

(1) $624,912 (2) $660,000 (3) $976,426 (4) $634,728

-

N 15×12 J 12 = 12 1. M = LV x LTV%

IYR 12 Pmt = 12
= 880000 ✗
75%
PV
694,347.199 M = 660000
PMT 8333.33 I 2. Pmt= I ÷ DCR

FV OI 211250T
¥000
=

#PYR 12

6. What will be the maximum loan granted on a commercial building with a lending value of $4,250,000 and
yielding a net operating income of $212,500 per year, where the lender requires a debt coverage ratio of 1.3 and a
65% loan-to-value ratio. The loan will be amortized over 25 years with annual payments and the interest rate is
6.5% per annum, compounded annually. Round your answer to the nearest $1,000.

(1) $1,994,000 (2) $2,997,000 (3) $1,592,000 (4) $2,762,500

-

N 25 J = 6. 5 1. M = LV x LTV%
,

IYR 6- 5 Pmt = I

= 4250000 ✗ 65%
PV
1,993,883 - 1994000
2,782,500
.
.
.

PMT
163,461.54 I 2. Pmt= I ÷ DCR
-

FV OI

#PYR , =ZY¥°= 163461.54 lyr

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 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
7. Mombasa Logging Company wants to borrow money to build a head office building in Victoria. The company
plans to occupy one floor of the building and rent out the rest. They project that the building's net operating
income for the next five years will be $637,500 per year. Current mortgage terms on office building projects are j1
= 14%, amortized over 30 years with quarterly payments. River Bank feels that Mombasa Logging is optimistic in
their net operating income projections and has therefore set the required debt coverage ratio at 1.5. What amount
(rounded to the nearest thousand dollars) could Mombasa borrow from River Bank?

(1) $ 3,128,000 (2) $ 7,038,000

(3) $ 1,043,000 (4) $12,512,000

N 30 # N J = 14 1. M = LV x LTV%
,

1
IYR Pmt = u
&
PV 3 1 28 115.32 -

☒ 3128000
,

PMT 106 250 I 2. Pmt= I ÷ DCR

FV 01

,
#PYR °"¥=
Easy questions (one constraint):
4250¥
8. A property is listed for $133,333 but the market value, as estimated in a recent appraisal, is $127,500. The
property's lending value is estimated to be $120,000. Jay and Joan purchase the home for $128,500 subject to
mortgage of $84,000. What loan to value ratio was applied by the lender with whom Jay and Joan negotiated the
mortgage? (Assume that the loan to value ratio was the binding constraint on the loan size).

(1) 67.5% Lending value (LV) = 120,000

• 70%
(2) Market value/App = 127,500
(3) 72% Purchase price = 128,500
(4) 75% List price = 133,333

9. An individual is planning to purchase a property that has a list price of $69,000. The proposed purchase price
will be $67,000 and the lender will apply a lending value of $66,000. How large will the down payment be if the
lender insists on a maximum loan to value ratio of 80%?
(1) $14,200
(2) $16,500
(3) $50,250
(4) $52,800

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 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
10. If an applicant for a mortgage loan has income of $1,000 per month and taxes are estimated at $600 per year
and the permitted gross debt service ratio is 30%, what can the applicant afford to pay for monthly principal and
interest?
(1) $285
(2) $240 10001m ✗ 30T .
-
600 /yr
(3) $300
(4) $250
f- 10001m ✗ 30-1 ,
-

00€ =
$250
11. A potential borrower with an annual income of $48,000 and property taxes of $2,000.16 per annum has been
told by a mortgage lender that the largest loan available will be $177,667. What is the maximum gross debt
service ratio allowed by the lender given that the loan has monthly payments and is to be written at 5% per
annum, compounded semi-annually and amortized over 25 years?
(1) 25% (2) 27.5% Pmt = I x GDS% - Tax
(3) 32% (4) 30%

N 25 # N J =5 1. M = LV x LTV%
z

→IYR Pmt =

PV 177 667

PMT 10 33.32×12 2. Pmt = I x GDS%

e - Tax-

FV OI

#PYRI PMTt=GDS 12399%0%-000=0.30

✗
100=3040
12. Given the following information, calculate the minimum annual income a purchaser must have in order to qualify for
a $42,500 loan.
Interest rate: 11 3/4% per annum, compounded semi-annually
Term: 5 years; Amortization period: 25 years
Payments: Monthly; Maximum Gross Debt Service Ratio: 28%, Net Real Property Taxes: $600 per annum
(1) $20,728.89 (2) $20,620.29 Pmt = I x GDS% - Tax
(3) $16,939.56 (4) $19,161.78

N 25# N J z
= 11.75 1. M = LV x LTV%

÷
IYR Pmt =

PV 42500

PMT 431.1381 2. Pmt = I x GDS% - Tax

FV OI
©2021 GOBC Training LTD

y
#PYR
=2PM¥¥= 5173.64%000142
86
 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
Stress Test Questions
Stress-testing a client’s budget involves an analysis of how the client will be able to manage certain variances:

› how easily can the client afford a two or three percentage point increase in the interest rate?

› understand the client’s liquid assets (if the client’s income becomes interrupted for three to six months)

› it’s also called the benchmark interest rate.

-

13. mortgage broker is considering how her client would be affected if his income were to become interrupted for six months.
This is known as:
1. strength – assessment
2. variability- measuring
3. income-assessment
4. stress-testing
-

14. A borrower approaches a bank for a mortgage loan that has an 80% loan- to value ratio. The contract rate is 3.5% per
annum, compounded semi-annually and the Bank of Canada posted 5-year rate is 4.7% per annum, compounded semi-
annually. At what rate will the borrower have to qualify to fulfill the stress test borrower qualification rule for uninsured
mortgages?
1. J2=4.7%
5.5
2. J2=3.5%
3. J2=5.5% •
3,5% + 2% =

4. J2= 6.7%

15. Jake wants to purchases a house that is listed for $276,000. The bank’s appraiser estimates that the lending value of the
property is $275,000. Jake’s gross annual income is $50,000 per year. The bank applies an 80% loan-to-value ratio and a gross
debt service ratio of 32%. Property taxes amount is $1,800 per year. Assume that the lender demands a 25-year amortization
period and monthly payments at a contract rate of J2 = 4.2%. The Bank of Canada’s posted 5-year rate is 5% per annum,
compounded semi-annually. How much can Jake borrow, given the stress test borrower qualification rules for uninsured
mortgage? Round the answer to the nearest $10
1. $220,000 N 75# N m= 275000×80-1 .

2. $175,600
3. $206,360 DX 181503.97
4. $181,560 M= 220000
PMT 1183.33 I

F" OI 50000×32%-1 9800

=/ 81560
= 1183.33
16. A young executive has applied to her bank for a mortgage loan to enable her to purchase a home. Her income is $55,000 per
year. The bank informs her they will apply a 32% gross debt service ratio when calculating her maximum loan, and that current
mortgage rates are 4.1% per annum, compounded semi-annually for 20-year amortization mortgages. The Bank of Canada posted 5-
year rate is 4.65% and mortgage payments are to be monthly. Annual property taxes are $2,000. What is maximum mortgage loan
the bank will grant, given the stress test borrower qualification rules for uninsured mortgages?
$167,963.81
55000×72 2000
-

$181,106.38
# N 52=6.1
$157,986.22 20
$170,412.28
py 18110058 = 50600 / yr
13001 -12=1300 1Mt
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pilot
 MATH CLASS 6- LTV%, GDS%, DCR, Stress test
Math 6 Law
17. The risk to a mortgagee can be reduced by:
(1) increasing the amortization period.
(2) reducing the monthly payments.
(3) reducing the loan-to-value ratio.
(4) reducing the debt coverage ratio.

18. Lenders who are attempting to ration mortgage funds could:

(1) decrease their gross debt service ratio.
(2) decrease their interest rate on mortgage loans.
(3) increase their maximum loan to value ratio.
(4) increase the maximum amortization period available on mortgage loans.

19. The loan to value ratio is the ratio of:

(1) the annual payments on the loan divided by the market value of the mortgage.
(2) the actual amount of the mortgage (the amount paid to the borrower net of bonus or brokerage fees) divided by the actual
value of the property.
(3) the market value of the mortgage divided by the market value of the property.
(4) the face value of the mortgage loan divided by the lending value of the property.

20. With respect to an insured mortgage loan, which one of the following statements is FALSE?
(1) Default insurance is paid for by the borrower.
(2) The rate of interest on insured loans tends to be lower than on comparable uninsured loans.
(3) If the borrower defaults, the insurance company will guarantee that the lender
will recover all capital invested.
(4) The lender has only the personal covenant of the borrower and the value of the property for security.

21. Lending value is:

(1) equal to market value.
(2) a long-term conservative estimate of the value of the interest in land pledged as security.
(3) an estimate of the mortgage loan a purchaser will be able to obtain.
(4) equal to 95% of purchase price.

22. A balloon payment is any payment of:

1) interest over or above regular interest payments, but only when it occurs during the term of the loan
2) principal over and above the regular payments, whether it occurs during or at the end of the loan term
3) principal over and above the regular periodic payments, but only when it occurs at the end of the loan term
4) interest over and above regular interest payment, whether it occurs during or at the end of the loan term

23: Which of the following statements regarding repayment and refinancing methods is/are FALSE?
A. if a variable rate mortgage is “open”, any principal repayment above an agreed upon threshold will attract an interest
penalty.
B. In graduated payment mortgages, payments are increased during the loan term
C. in a variable rate mortgage, the interest rate is changed periodically but the required payment is never changed.
D. From the borrower prospective, the reverse annuity mortgage allows a means by which the equity rich mortgagor may
postpone selling his/her residence.
1) B is false
2) A and C are false
3) A, C and D false
4) All of the above statements are false
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Answers: 17(3), 18(1), 19(4), 20(4), 21(2), 22(2), 23(2)