Banker explains how ability to repay rule can affect your next home loan

Mortgage banker: Harry Sessa Purchase price: $283,500 Conventional loan amount: 255,150

Backstory: Prior to the ‘mortgage crisis’ at the end of the last decade, many mortgages were approved with little scrutiny of the borrower’s ability to repay (ATR) the loan.

Some lenders failed to verify income or debts and qualified consumers for mortgages based on undocumented assets and/or income. This contributed to one of our most serious recessions since the Great Depression.

In 2008, under the Truth in Lending Act, the Federal Reserve adopted a rule which prohibits lending without thoroughly assessing the borrower’s ability to repay the loan. According to the rule, which went into effect in 2009, lenders have to follow specified underwriting practices to confirm borrowers can actually pay back the mortgage loan.

Lenders must consider eight underwriting factors:

(1) Current or reasonable income or assets.

(2) Current employment status.

(3) Monthly payment on the proposed loan (principal and interest).

(4) Monthly payment on any pending loans.

(5) Monthly payment for other mortgage-related obligations (taxes, homeowners insurance and condominium fees.)

(6) Debt obligations, alimony and child support.

(7) Monthly debt-to-income ratio or residual income.

(8) Credit history.

Harry Sessa had clients recently whose mortgage approval was directly affected by the ATR.

This particular married couple had good credit history and met all criteria needed for the ATR rule with one initial exception. One spouse had been working as an accredited teacher for two years after college.

However, three months before applying for the new home loan, the borrower left teaching and took a new position as assistant manager for a well-known restaurant chain. His part-time experience as a waiter provided some consistency yet his current employment status as assistant manager was a red flag for the ATR.

Lenders feel uncomfortable using any borrower’s income to qualify based on short-term employment combined with a switch in their primary type of employment. The borrower had been in the restaurant business, but he had no history in management. For the lender, ATR was therefore of primary concern.

Ultimately, the couple was able to bring in a family member as a co-borrower for the loan to be approved.

The takeaway here is to be sure to be pre-approved and tell your loan officer about any recent changes of employment or any of the items listed above as a potential road block to financing.

Harry Sessa, NMLSR 632510, United Bank, 203-494-1478