The Co-Signed Condo and the Undisclosed Rental
Priya, a mortgage agent, takes an application from Daniel and his fiancée Mei. Daniel earns $92,000 salary; Mei is a contract nurse with 14 months of self-employment income averaging $78,000 but only $41,000 declared on the most recent Notice of Assessment after expenses. They want to buy a $640,000 condo with 10% down. Daniel's credit bureau shows a $28,000 car loan with 41 months remaining at $610/month, and a $15,000 line of credit at $0 balance that he co-signed for his brother three years ago. Daniel says his brother pays it, but two 30-day lates appeared in the last 12 months. The couple also mention they will rent out the den for $900/month, though the property is a standard owner-occupied purchase and no lease exists. GDS/TDS limits are 39/44. Estimated heating and taxes are $340/month; condo fees are $410/month.
1. How should Priya treat the co-signed line of credit and the late payments in the debt service calculation, and what must she disclose to the borrowers?
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The co-signed line of credit must be counted as Daniel's debt. A co-signer is jointly and severally liable, and lenders treat a co-signed obligation as the applicant's own unless the primary borrower's payments can be verified for 12+ months and the lender agrees to exclude it. Here the file shows two 30-day delinquencies in the last 12 months, which defeats any exclusion argument and also weakens the credit profile.
For qualification, the lender will typically use either the balance or 3% of the limit, whichever is greater - 3% of $15,000 = $450/month. Priya should confirm the lender's specific policy (some use the actual payment, some use a percentage), but she must not present it as zero. She should also document the lates in a credit explanation letter and be transparent that the co-signed debt reduces borrowing capacity.
Disclosure: Priya must tell Daniel in writing that the co-signed debt is being counted, that the lates are on his bureau, and that removing himself as co-signer (if the brother can qualify alone) would be the cleanest fix. She must not advise him to conceal it or to dispute accurate information.
2. Can the projected $900 den rental be used to qualify? Explain how rental income is normally treated and what Priya should do here.
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No - not on this file. Rental income is generally only usable when it is supported by evidence: a signed lease, historical rental deposits, or, for a subject property, a lender-accepted market rent appraisal plus a demonstrated intent to rent. Here there is no lease, the purchase is a standard owner-occupied application, and the income is speculative. Most lenders will refuse it outright; some allow a percentage (often 50–80%) of documented market rent on a two-unit owner-occupied property, but a rented den in a condo is not a separate unit and is rarely accepted.
Priya should qualify the file without the $900 and treat any future rental as a buffer, not a qualifier. If the couple needs the income to pass TDS, the file is not approvable as structured and she should say so. She must also flag that misrepresenting occupancy (claiming owner-occupied while intending to rent) can constitute fraud and breach insurer and lender requirements.
3. Using the figures given, estimate the monthly housing cost and assess whether the file is likely to pass GDS/TDS. Show your arithmetic and state assumptions.
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Assumptions: 10% down on $640,000 = $64,000, so the mortgage is $576,000. At an illustrative contract rate of 5.5% over 25 years, the payment is roughly $3,520/month (Priya should use the lender's actual qualifying rate, often the contract rate or the stress-test rate, whichever is higher).
Housing cost = $3,520 + $340 (heat/tax) + 50% of condo fees ($205) = $4,065/month. Note: many lenders use 50% of condo fees, and some add the full fee if it includes utilities.
GDS = $4,065 / ($92,000 + $78,000)/12 = $4,065 / $14,167 = 28.7% - passes 39%.
Other debts: car $610 + co-signed LOC $450 = $1,060. TDS = ($4,065 + $1,060) / $14,167 = $5,125 / $14,167 = 36.2% - passes 44% on these figures.
The arithmetic passes, but the qualitative risks matter: Mei's income may be averaged or discounted (14 months of self-employment is thin, and declared income is well below gross), the lates are a credit concern, and the rental income is excluded. Priya should confirm the lender's income-averaging policy and present the file conservatively rather than relying on the den rent.