The ability-to-repay rule requires lenders to make a reasonable, good faith determination that you can repay your mortgage before they approve the loan.
Lenders must verify your income, assets, employment status, and debt obligations. They calculate your debt-to-income ratio to ensure the payment is affordable.
This rule was created to prevent predatory lending practices that contributed to the 2008 housing crisis.
What It Means
The rule requires lenders to consider eight factors: current income, current employment status, monthly payment on the loan, monthly payment on simultaneous loans, current debt obligations, DTI ratio, credit history, and monthly payment for mortgage-related obligations.
How Lenders Verify
Lenders request pay stubs, W-2s, tax returns, bank statements, and employment verification. Self-employed borrowers provide additional documentation. All income must be documented and verified through third-party records.
QM Standards
Qualified Mortgages meet the ability-to-repay standards. QM loans have no negative amortization, no balloon payments (with exceptions), a 30-year maximum term, and points and fees limited to 3% of the loan amount.
DTI Limits
Most lenders require a DTI ratio of 43% or lower for QM loans. Some loans allow up to 50% DTI with compensating factors like high credit scores or significant reserves. A higher DTI means more scrutiny.
Exceptions
Some loans are exempt: timeshare plans, reverse mortgages, temporary loans, and certain community development loans. Non-QM loans must still make a good faith ability-to-repay determination.
How It Protects You
The rule protects you by preventing lenders from making loans you cannot afford. If a lender makes a loan without properly verifying your ability to repay, you may have legal recourse to defend against foreclosure.