The Renovation Appraisal That Does Not Support the Loan
Sonia is underwriting a refinance for Kwame on a detached two-storey home. The borrower reports a value of $850,000 based on a neighbour's recent sale and a finished basement he completed himself. The lender's appraisal comes in at $735,000: the appraiser notes the basement finishing lacks permits, one bedroom has no egress window, and the subject has a smaller lot than the comparables used. Kwame is requesting $600,000 (80% LTV) to consolidate $95,000 of credit card debt and fund a business expansion. His income is $110,000, and existing housing costs are $2,400/month. The lender's maximum LTV for debt consolidation refinances is 80%, but unpermitted living space cannot be included in gross living area.
1. How should Sonia treat the unpermitted basement and the non-egress bedroom in the valuation?
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The appraiser's $735,000 is the supportable value, and Sonia should not adjust it upward based on the borrower's estimate. Unpermitted basement finishing is typically excluded from gross living area or valued at a reduced contributory value; it cannot be treated as above-grade living area. The bedroom without egress is a life-safety defect and may not be counted as a bedroom - it should be described as a den or storage room, which reduces bedroom count and comparability.
Sonia should confirm the appraisal report's commentary on these items, check whether the appraiser made a cost-to-cure deduction for egress, and verify the comparables are truly similar in lot size. She should not instruct the appraiser to hit a value - that is a regulatory violation. If Kwame wants the higher value recognized, the path is to obtain permits and install egress, then re-appraise; until then, underwrite to $735,000.
She should document the discrepancy between borrower estimate and appraised value in the file and explain it to Kwame in writing.
2. Calculate the maximum loan under the lender's 80% LTV policy and determine whether the requested $600,000 can be approved.
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80% of $735,000 = $588,000. The requested $600,000 exceeds the policy maximum by $12,000, so it cannot be approved as structured at 80% LTV. At $600,000 the LTV would be 81.6%, above policy.
Options: (1) reduce the loan to $588,000, leaving the $95,000 consolidation plus about $493,000 of net proceeds - Kwame would need to fund the $12,000 gap from other sources; (2) seek a policy exception if the lender permits, which requires documented compensating factors and is not guaranteed; (3) re-appraise after permits and egress, which could restore value but delays funding.
Sonia should also check whether the lender applies a separate, lower maximum for the debt-consolidation portion or requires a minimum equity cushion. She should present the $588,000 option clearly and let Kwame decide, rather than submitting an over-LTV file that will be declined and delay his business timeline.
3. Assess the affordability of the refinance and identify any underwriting concerns beyond value.
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At $588,000 over 25 years at, say, 5.5%, the payment is about $3,600/month, versus current housing costs of $2,400. Adding taxes and heat, housing cost might be roughly $4,000/month. On $110,000 income ($9,167/month), GDS is about 43.6% - above the typical 39% limit. That is a serious concern.
However, the refinance also eliminates $95,000 of credit card debt. If those cards carried payments of, say, $2,400/month at 20%, the total debt service before was $2,400 housing + $2,400 cards = $4,800; after, it is about $4,000 with no card payments. TDS may actually improve. Sonia must obtain the actual card statements and minimum payments, not estimates.
The business expansion is a risk: funds diverted to a business are not secured by the home and may not generate income for some time. Sonia should confirm the business is established, request financial statements or tax returns, and consider whether a portion of the proceeds should be held back or the loan sized more conservatively. She should also verify Kwame's income is stable and documented, and check that consolidating unsecured debt into a mortgage does not simply free up cards for re-borrowing - a common post-funding risk.