You work at a bank. A woman comes to borrow money from the bank. Here are the basics of her financial situation (admittedly incomplete, but in the ballpark):
She earns $140K/year after-tax. She’s a consultant and her job is very stable. In a really bad year her income might dip 5% (as it did recently), but it rarely increases by more than 3% in real terms. But, again, over the long term her income is quite stable. The current outlook is that her income will be basically flat for the next 5-10 years. She has been spending a bit more than her income for the last several years but says that she’s gotten this under control. She has $360K in debt. About half of that – or $180K – is a mortgage fixed at 4.5% for 30 years. She has no equity in her house, however. Although clearly there’s plenty of income to cover the mortgage. The other $180K in debt is a revolving credit line (interest-only) at 4% that matures every five years. The current five year term is up and she’s looking to renew it through your bank.
Now, from a collateral perspective, she doesn’t look too great – not much net worth there. On a cash-flow basis, however, she looks pretty good because her income is very stable and her ability to cover her fixed payments is good. Also, with a little discipline, she should be able to reduce her spending to a break-even level as well.
How do you feel about this borrower from an underwriting perspective?
