This story was published in the San Francisco Chronicle Sunday Real Estate Section

• Property type: Owner-occupied single family residence
• Location: Menlo Park, CA
• Appraised Value: $1.87 million
• Borrowed Amount: $1.15 million
• Loan Type: 5 year fixed ARM
• Rate: 3.00% / 3.041% APR

Backstory:

This married couple refinanced their home loan to lower the interest rate from 5.50% to 3.00%. This reduced the interest expense on their home loan by 45%. The new loan only replaced their existing home loan balance. They did not take cash out and there was no other loan is second position.

What made this transaction unique is how they qualified.

Before coming to me, this couple had been frustrated to learn that they did not have sufficient income to qualify for a refinance on the traditional basis of calculating their income using their tax returns alone. A few other lenders had turned them down using this standard approach.

However, in the jumbo loan market, a few key lenders have discretion to qualify a borrower using an expanded approach that looks beyond just the income demonstrated by tax returns. (They have this discretion because jumbo loans today are often made by banks as an investment to keep on their books and not with the intent to sell the loan to a third party. They are not subject to the underwriting standards of what Fannie Mae or Freddie Mac will buy).

The expanded approach requires that the borrower has considerable financial assets (cash, stocks, bonds, or other marketable securities). The lender presumes that the borrower could, if necessary, spend down their financial assets to supplement their income. The basic formula is to divide the borrowers financial assets by 10 and add that figure to the borrower’s annual income.

In this case, the borrowers previously did not qualify because their housing debt ratio was more than 50% of their income. However, using the alternate expanded approach (called “asset depletion” in the trade), these borrowers were able to supplement their income for mortgage underwriting purposes. This brought their housing debt-to-income ratio under 30% and hence they qualified for the new loan.