Qualified Mortgages and Ability to Repay: What it Means for You

What is Qualified Mortgage?

  • The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to issue and implement regulations requiring creditors to assess a consumer’s ability to repay a residential mortgage and define “qualified mortgages” that presumptively comply with ability-to-repay (ATR) requirement.
  • Effective January 10, 2014, The ATR / Qualified Mortgage rule requires a creditor to make a reasonable and good faith determination at or before loan closing that the consumer will have a reasonable ability to repay the loan according to its terms.
  • In order to make sure you are not taking on more house than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Lenders can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.

What is Ability to Repay (ATR)?

  • Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest housing payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations (including student loan, credit card and car payments, housing costs, utilities, and other recurring expenses), and divide it by your monthly gross income (income before taxes).
  • In an effort to put an end to no- or low-doc loans, where lenders issue risky loans without the necessary financial information, lenders will be required to document and verify an applicant’s income, assets, credit history and debt. Underwriters must also approve loans based on the maximum monthly charges you face, not just low “teaser rates” that last only a matter of months, or a year or two, before resetting to a higher rate.

QM / Ability to Repay Requirements

  • Income, assets and debts must be documented and verified.
  • A borrower’s monthly debt, including the mortgage, cannot be more than 43% of the borrower’s monthly pre-tax income.
  • ARMs (Adjustable Rate Mortgages)
    • The qualifying payment must be based on the maximum possible rate in the first five years.
  • QMs may not have the following risky loan features:
    • an “interest-only” period
    • negative amortization
    • balloon payments
    • graduated payments
    • loan term greater than 30 years
    • points and fees greater than the following:

Loan Amount

Limit*

>= $100,000 3% of Total Loan Amount
< $100,000 to >= $60,000 $3,000
< $60,000 to >= $20,000 5% of Total Loan Amount
< $20,000 to >= $12,500 $1,000
< $12,500 8% of Total Loan Amount

*Does NOT include:

  • realtor fees
  • appraisal costs (unless third party affiliate)
  • title costs (unless third party affiliate)
  • credit reports

*Points and Fees included:

  • fees paid to lender
  • fees paid to lending affiliates
  • mortgage broker compensation
  • discount points (up to two discount points may be excluded if a test is performed to determine whether the interest rate reduction is consistent with the discount points paid)

New Ability to Repay Underwriting

The customer’s ability to repay a mortgage must be verified through third party documents considering a minimum of eight underwriting factors:

  • credit history
  • current and expected income or assets
  • employment status
  • monthly debt-to-income ratio or residual income
  • current debt obligations, alimony, and child support
  • the monthly payment for mortgage-related obligations
  • the monthly payment on the subject loan; and
  • the monthly payment on any simultaneous loan

If you have any questions or would like to discuss how this may impact you, please do not hesitate to give us a call.