Understanding the basics of the Ability-to-Repay Standards

English: Mortgage debt
English: Mortgage debt (Photo credit: Wikipedia)

Understanding the basics of the Ability-to-Repay Standards

Discover what new information is required of potential borrowers with regard to new mortgage loan applications now that Ability-to-Repay (ATR) Standards are in effect.

In 2013, federal regulators issued Ability-to-Repay (ATR) Standards intended to ensure that borrowers can comfortably afford a home loan. The ATR Standards go into effect for loan applications received on or after January 10, 2014.

Clients should be aware that the new rules require lenders to collect and verify eight types of financial information from a potential borrower:

  1. Current income and assets
  2. Current employment status
  3. Credit history
  4. Monthly payment for the mortgage
  5. Monthly payments on other mortgage loans (second-lien loans made at the same time as the first-lien mortgage)
  6. Monthly payments for other housing-related expenses, such as property taxes, homeowner’s insurance and homeowner’s association fees
  7. Amounts paid on all other debts
  8. Monthly debt payments compared to monthly income, aka debt-to-income ratio

Taking all of this into consideration, the lender must determine that a borrower has sufficient income/assets and a debt-to-income ratio that would enable the borrower to comfortably afford their monthly mortgage payment.

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The Right Credit Level for You

The Right Credit Level for You 

You should borrow only enough money to make the purchase you have planned, rather than borrow as much as you can get:

  • Decide on your short and long-term financial goals
  • Calculate your average monthly income and expenses (including all the bills and debt you’re currently paying)
  • Establish a saving and spending plan

    298/365 Calculate This
    298/365 Calculate This (Photo credit: stuartpilbrow)
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How much debt is okay?

How much debt is okay?

Some argue that any debt is too much. Others say that you should have only good debt (for investing) and no bad debt (for spending).  In reality though, debt is simply a financial tool that you should use wisely to avoid getting in over your head.

There are several measures you can use to determine whether you’re carrying too much debt.  One we rely on is known as the total debt service(TDS) ratio. As a general guideline, no more than  40% of your monthly gross (before deduction/taxes) income should go toward mortgage loan payments and other monthly debt obligations.

English: Mortgage debt
English: Mortgage debt (Photo credit: Wikipedia)

Realistically, the amount of credit you can afford depends on your personal situation.  If your current employment is not secure, you will probably want to take on less credit than the recommended guidelines. On the other hand, if you have no other obligations, such as a mortgage, and your source of income is reliable, you may want to take on more credit, depending on your goals.

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