Consumer asking for cash-out refi on primary dwelling. Majority of proceeds to clear current lien, rest to be used for home improvement. Consumer discloses deficiencies in collateral, but estimated value supports request as is, as do customer's DTIs. No appraisal or inspection completed yet for this request, only assumptions about collateral value and condition.

UW wants to counter with use of managed construction product (with added construction management fees, 442, etc.) with I/O period for improvements based on dollar amount used for improvements and UW's "assumed deficiency of collateral".

I believe we must approve credit request, conditional to return of appraisal / inspection. Based strictly on repayment capacity and estimated collateral value, loan would qualify and we don't have any supporting information to confirm otherwise.

If customer had disclosed proceeds would be for a lavish vacation, we would not counter with a different product, does knowing the use of funds in this instance allow us to counter this way?

I agree with you- as a former underwriter, I would be treating it just like any other loan, waiting for the appraisal/inspection. The deficiencies in the collateral could be cosmetic and not affect value.

I agree with you and Tracey

I'm going to take an opposite stance. If in the course of the loan interview the applicant discloses to you there is a 10 foot hole in the roof from the recent storm then you are within your rights to:

1. Decline the loan due to the condition of collateral based on the applicants comments, regardless of its estimated market value.
2. Conditionally approve the loan, as mentioned, subject to a satisfactory evaluation and control of the funds to repair the damage. All funds would not be released until repairs are complete. (This presents an issue with the outstanding liens.)

Simply because the estimated market value may meet LTV requirement does not mean the condition of the collateral is acceptable. I know my 10 foot hole in the roof example is to the extreme but my point is the condition and maintenance of the collateral is a factor in addition to its estimated market value. Cosmetic deficiencies may not affect the "appraised" estimated market value but they most certainly affect the market appeal and therefore by proxy affect the value. And I can assure you if the appraiser estimates the cosmetic repairs to be $5,000. The bank can pretty well depend on the cost to do the repairs when they have to hire them done to be $10,000 to $15,000.