The Refinance That Doesn't Add Up
Sonia is working on a refinance for Mr. Okafor. His application states $7,400 net monthly income from his job and $1,900 per month from 'rental income' on a basement apartment. He provides two recent pay stubs and a letter from a tenant confirming $1,900 per month rent, but no lease and no bank statements showing rent deposits. His credit report shows a $52,000 unsecured line of credit at 89% utilization, a $610 monthly payment on that line, and a $395 car lease. He wants to refinance to consolidate the line of credit and take out an extra $40,000 for a renovation. The appraisal comes in at $710,000, and he wants a mortgage of $595,000. The lender's maximum loan-to-value for a refinance is 80% and its TDS limit is 44%. The file is otherwise complete and the client is pressing for a quick approval.
1. Assess the income and debt figures and identify what Sonia must verify before the file can be submitted responsibly.
Read the worked answer
Rental income. A tenant letter is weak evidence. Sonia needs the lease and bank statements showing the rent being deposited over a period, and she should confirm whether the lender allows a gross or net rental offset and at what percentage. Without deposit evidence, the $1,900 should not be counted.
The line of credit. At 89% utilization, the lender may use the actual payment or a qualifying payment based on the full limit, depending on policy. Sonia must confirm which method applies; the difference is material. She should also ask why utilization is so high and whether there are undisclosed debts, since the refinance is partly to pay it off.
Loan-to-value. $595,000 against a $710,000 appraised value is about 83.8%, above the lender's 80% maximum. On the appraised value, the maximum mortgage is $568,000. The requested amount does not fit unless the value is higher or the loan is reduced.
Sonia should not submit a file with unverified rental income and an LTV above policy just because the client is in a hurry.
2. Using the verified figures only, explain the qualification problem and how Sonia should communicate it.
Read the worked answer
On verified income of $7,400 per month, the 44% TDS limit allows $3,256 of total monthly debt service. The line of credit payment of $610 and the car lease of $395 already consume $1,005, leaving about $2,251 for the new mortgage payment plus property taxes and heating.
If the rental income is not verified, it cannot be used to raise the allowable payment. Even if it is verified, the lender may apply only a portion of it. At the requested $595,000, the mortgage payment at a typical rate would likely exceed the remaining room, particularly once taxes and heating are included. And the LTV issue independently caps the loan at $568,000 on the appraised value.
Sonia should present the arithmetic plainly: the maximum mortgage the lender will allow on this appraisal, and the payment the verified income supports. She should explain that the $40,000 renovation portion may need to be reduced or deferred, that the rental income can be counted once documented, and that paying down the line of credit before applying could improve the picture. She should document the conversation and avoid promising an approval she cannot support.