by Andrew Augustyniak, Peoples Mortgage
With the heat rolling in, we know Summer in Arizona is officially in full force! With, Arizona is also proving that the market is not slowing down here anytime soon. With the market only being slightly affected with everything going on, new home loan application in the last month are now up 18%. Arizona was already a desirable area to move, but now in my opinion the appeal of Arizona has only strengthened. Mark my words, we will see a larger influx on top of the insane amount of people that were moving here daily before.
What is Ability to Repay (ATR)
Ability to repay (ATR) is part of Regulation Z and the Truth In Lending Act (TILA) and is enforced by the Consumer Financial Protection Bureau (CFPB). The CFPB issued the final rule on the matter late 2013 and it became effective January 2014 and was part of the overhaul to the financial system through the Dodd-Frank Act following the 2008 financial crisis.
The main requirements of the act require a lender to make a good faith determination of the borrower’s ability to repay any credit transaction that is secured by a dwelling. Further, it establishes certain protections for the lender for meeting the ability to repay guidelines which is a requirement for a ‘qualified mortgage.’ Under ATR, there are eight underwriting factors that must be considered and documented to meet the rule requirements:
- Current or reasonable expected income and/or assets that the consumer will rely on to repay the loan
- Current employment status
- Projected monthly mortgage payment for the loan using the fully indexed or introductory rate, whichever is higher.
- Projected monthly payment of subordinate financing secured by the same property
- Monthly taxes, insurance, and homeowners association fees
- Debts, alimony, and child-support obligations
- Monthly debt to income ratio or residual income
- Credit history
Additionally, the act poses restrictions on prepayment penalties as well as ensuring that a borrower is not qualified for a mortgage loan based on an introductory or teaser rate – the lender is required to ensure that the borrower qualifies at the higher rate as well once the introductory rate period is over.
Areas not covered by the rule are open-ended credit transactions (HELOCs), time share loans, reverse mortgages, and temporary/construction financing.