Prior to the mortgage crisis, lenders made loans without much consideration. Yes, there were fully verified conventional loans. But, there were also stated income loans, where all you had to do was ‘state’ your income. Today these loans are not available. All lenders must abide by is the Ability to Repay Rule.
We take a look at how this rule may affect you below.
The Definition of the Ability to Repay Rule
Let’s start with what the Ability to Repay Rule means. As the name suggests, a lender must be able to determine that you can afford the loan. Rather than allowing willing lenders to skip income verification for borrowers, every loan must have documented income. This is the only tried and true way to ensure that a borrower can afford a loan.
No matter the type of loan, lenders must fully verify a borrower’s income. This means they must get concrete evidence whether with paystubs and W-2s or bank statements if it’s a non-prime loan and the lender allows it. The bottom line is that the lender must be able to prove that they verified your income and that you can afford the loan.
The Ability to Repay Rules
There are eight strict factors that the Ability to Repay Rule requires. They are as follows:
- Proof of your income beyond a reasonable doubt with a reasonable source, such as paystubs or bank statements
- Proof of your employment via a third party (your employer)
- The full loan amount
- Proof of any liabilities tied to the home (2nd mortgage)
- Proof of the cost of homeowner’s insurance and real estate taxes on the property
- Proof of current liabilities and their monthly obligations
- Calculation of your current debt-to-income ratio
- Proof of your credit history/score
These eight factors are the minimum required by the Dodd-Frank Act. It does not restrict lenders from requiring more information if they so wish.
Who Does the Rule Help?
It might seem like the Ability to Repay Rule hurts you, but it’s really for the consumer protection. Why would you want a loan you can’t afford? That’s why the ATR is in place. It helps make sure lenders do not bend the rules and give you a loan you cannot afford. You can only get a loan if you can prove you can afford it. Without the proof, there is no loan. If you get a loan you cannot afford, there is a chance of you taking legal action against the lender if you enter foreclosure.
If you prove that you can afford the loan and all of a home’s expenses comfortably, then the loan is a good fit. If you don’t prove that you can afford it, the lender puts you out on a limb. If you foreclose on your home in the future, you lose your home and the lender has the burden on their hands.
The Ability to Repay Rule is meant to protect everyone involved in the mortgage loan process. It helps you stick to loans you can afford while requiring proper income verification. The lender must prove they verified everything that affects your loan including your income, liabilities, and credit history. If everything is in line, the rule will not stand in your way of getting a loan.