Mortgage Financing 101

Table of Contents: 

Stage 1: Initial Introduction & Pre-Approval

Stage 2: Income Verification

Stage 3: Debt Assessment

Stage 4: Down Payment Verification

Stage 5: Debt Service Ratios

Stage 6: Stress Testing

Stage 7: Choosing the Right Lending Category

Stage 8: Property Review and Underwriting

Stage 9: Final Approval Conditions

 

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Understanding mortgage financing is essential for every new real estate agent. Whether your client is a first-time buyer, a move-up purchaser, or self-employed, the financing process will directly impact timelines, negotiations, and ultimately whether a deal closes. This guide walks step-by-step through what your client experiences from first introduction to final mortgage approval. It explains how lenders assess income, debts, down payment, and property details, and outlines the differences between standard bank (A) financing, alternative (B) lending, and private mortgages. You will learn how debt service ratios work, how income is calculated for salaried and self-employed borrowers, what documentation is required, how down payments must be verified, and why pre-approvals are critical. By understanding these stages and qualification requirements, you will be better equipped to spot red flags early, set realistic expectations, structure offers confidently, and guide your clients through one of the most important financial steps of their lives.

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Why Financing Knowledge Matters for New Agents

As a new real estate agent, you will quickly discover that financing determines what your client can buy, how competitive their offer can be, and whether a transaction closes smoothly.

Many buyers assume that if they “make good money,” they will qualify. In reality, lenders follow strict underwriting guidelines. Small details — such as how income is structured, how debts are reported, or how down payment funds are held — can dramatically affect approval.

When you understand the financing process, you can:

• Identify whether a client is realistically in the ballpark before showing homes.

• Encourage early pre-approvals.

• Avoid writing offers that cannot be financed.

• Structure subjects and timelines appropriately.

• Have informed conversations about pricing and affordability.

Let’s walk through the full lifecycle of a financed purchase.

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Stage 1: Initial Introduction and Pre-Approval

The First Conversation

Financing begins long before an offer is written. Ideally, clients should speak with a mortgage professional before they begin seriously shopping.

During this stage, the client completes a mortgage application outlining:

• Employment details

• Income

• Existing properties

• Debts and liabilities

• Down payment and savings

This gives the lender a baseline understanding of the client’s financial profile.

Why Pre-Approvals Matter

A proper pre-approval is more than a quick phone estimate. It involves:

• Reviewing documentation

• Calculating income accurately

• Running debt service ratios

• Securing a rate hold (often up to 120 days)

Without documentation, many “pre-approvals” are simply pre-qualifications and may fall apart once documents are reviewed.

As an agent, always confirm your client has completed a document-backed pre-approval.

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Stage 2: Income Verification

Lenders assess income differently depending on how it is earned.

All qualification is based on gross (pre-tax) income.

Salaried or Hourly Employees

Typically required:

• Letter of employment (dated within 30 days)

• Recent pay stub

The employment letter must confirm:

• Job title

• Length of employment

• Guaranteed income

Inconsistencies — such as reduced hours or unpaid leave — can impact qualification.

Maternity or Parental Leave

If a borrower is on maternity leave but returning to work within 12 months, many lenders allow the full pre-leave income to be used.

If the return date is further out, some lenders reduce usable income. Return-to-work confirmation is essential.

Self-Employed Borrowers

Self-employed income is more complex.

Traditional (A) lenders usually require:

• Two years of personal tax returns

• Two years of Notices of Assessment

Income is typically averaged over two years.

However, many self-employed individuals write off significant expenses, which lowers taxable income and reduces qualification power.

Alternative lenders may instead use:

• Six to twelve months of business bank statements

• Year-to-date commission statements

• Annualized gross revenue

This flexibility can significantly increase usable income for qualification.

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Stage 3: Debt Assessment

Lenders must account for all liabilities.

Common debts include:

• Car loans

• Student loans

• Credit cards

• Lines of credit

• Existing mortgages

How Payments Are Calculated

• Installment loans use their actual monthly payment.

• Credit cards and lines of credit are typically calculated at 3% of the outstanding balance, regardless of the actual minimum payment.

• Bi-weekly payments are converted into monthly equivalents using standardized formulas.

Even small balances can meaningfully affect qualification.

As an agent, be aware that paying down debt before closing can sometimes make the difference between approval and decline.

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Stage 4: Down Payment Verification

Down payment verification is one of the most document-intensive parts of underwriting.

90-Day History Requirement

Lenders typically require a 90-day history of the account holding the down payment funds.

Large deposits must be traced to their source. If funds were moved between accounts, each account may require its own 90-day history.

Encourage clients not to move money unnecessarily during the pre-approval and purchase process.

Gifted Down Payments

If part of the down payment is gifted:

• It must usually come from an immediate family member.

• A signed gift letter is required.

• Funds must be deposited into the buyer’s account before completion.

Lenders may request proof of the source account.

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Stage 5: Debt Service Ratios (How Qualification Is Calculated)

Two key ratios determine approval under standard bank financing:

Gross Debt Service (GDS)

The percentage of gross income allowed toward housing expenses.

Housing expenses include:

• Mortgage payment (stress-tested)

• Property taxes

• Heating costs

• Condo fees (if applicable)

Standard guideline: approximately 39% of gross income.

Total Debt Service (TDS)

The percentage of gross income allowed toward housing plus all other debts.

Standard guideline: approximately 44% of gross income.

If these ratios are exceeded, the borrower may need to:

• Reduce debt

• Increase down payment

• Lower purchase price

• Use a different lender type

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Stage 6: Stress Testing

Borrowers do not qualify at the contract interest rate.

They qualify at the greater of:

• The benchmark rate, or

• The contract rate plus 2%

This “stress test” ensures borrowers could afford payments if rates rise.

Higher interest rates significantly reduce purchasing power, even if income remains unchanged.

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Stage 7: Choosing the Right Lending Category

There are three primary financing categories.

A Lenders (Standard Bank Financing)

A lenders include major banks and credit unions. This is where most clients want to qualify because these lenders typically offer the most competitive interest rates.

These lenders are generally best suited for clients who:

• Have strong credit scores

• Have stable, predictable employment

• Can show a two-year income history (especially if self-employed)

• Fall comfortably within standard debt service ratios

Advantages:

• Lowest interest rates

• Longer amortizations and flexible product options

Challenges:

• Strict documentation requirements

• Limited flexibility with income exceptions

• Tighter debt ratio limits

If a client fits the guidelines cleanly, A lending is usually the first choice.

B Lenders (Alternative Financing)

B lenders, often referred to as alternative lenders, provide more flexibility when a borrower does not quite meet traditional bank guidelines.

This option is commonly used for clients who:

• Are newly self-employed

• Have fluctuating or hard-to-document income

• Have had past credit issues

• Exceed standard debt service ratios

Advantages:

• Flexible income verification (such as bank statement programs)

• More forgiving debt ratio allowances

• Willingness to consider unique situations

Considerations:

• Higher interest rates than A lenders

• Lender fees may apply

In higher-rate environments, alternative lending becomes more common because many otherwise strong borrowers fall just outside strict bank qualification rules.

Private Mortgages

Private mortgages are funded by individuals or private corporations rather than traditional financial institutions. They are typically used as short-term solutions.

This type of financing may be appropriate for clients who:

• Need fast approval to complete a purchase

• Have significant credit challenges

• Have unique property types or income structures

• Are in transition (for example, waiting for a property sale or business stabilization)

Advantages:

• Fast turnaround times

• Highly flexible underwriting

Considerations:

• Highest interest rates

• Shorter terms (often 6–24 months)

• Additional lender and legal fees

Private mortgages are usually temporary, designed to solve a short-term problem before moving the client back into A or B financing.

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Stage 8: Property Review and Underwriting

Once an offer is accepted, the file moves into the formal underwriting stage. At this point, the lender is no longer just reviewing the borrower — they are also reviewing the property itself.

The lender will carefully examine:

• The fully executed purchase contract

• The MLS listing

• The property disclosure statement

They are confirming that the property matches the type of financing being requested and that there are no hidden risks that could affect marketability or value. Certain property characteristics can raise additional questions or require extra documentation, including:

• Non-conforming or illegal use

• Significant renovations or unfinished construction

• Unique zoning or redevelopment language

• Rural, remote, or unusual property types

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Stage 9: Final Approval and Conditions

After the mortgage is submitted to the lender, the file does not immediately receive final approval. Instead, it typically comes back as a conditional approval. This means the lender is prepared to move forward — provided certain outstanding items are satisfied.

Common conditions may include:

• Updated pay stubs to confirm continued employment

• Final confirmation of down payment funds

• An appraisal to verify the property’s value

• Proof that specific debts have been paid out or reduced

At this stage, the deal is approved "on paper," but it is not complete. The mortgage only becomes firm once all conditions are reviewed and signed off by the lender.

Once the file receives final approval, the process moves into the legal stage. From there:

• Mortgage instructions are sent to the lawyer or notary.

• The client attends their signing appointment.

• Funds are advanced to complete the purchase on closing day.

For agents, this is an important phase to monitor closely. Clear communication and prompt document collection can prevent last-minute delays and ensure a smooth completion.

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Common Pitfalls New Agents Should Watch For

1. Clients without document-backed pre-approvals.

2. High credit card balances affecting ratios.

3. Self-employed clients relying on gross revenue instead of taxable income.

4. Tight timelines that do not allow for underwriting or appraisal delays.

 

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Final Thoughts: Your Role in the Financing Journey

You are not the lender, but you are a critical part of the financing ecosystem.

By understanding:

• How income is verified

• How debt is calculated

• How down payments are documented

• How ratios determine affordability

• How lender categories differ

You can protect your clients, strengthen your offers, and increase the likelihood that your deals close smoothly.

Financing is not just a checkbox on a contract — it is the foundation of every successful purchase transaction.