Ability to Repay/Qualified Mortgage Synopsis By Deene Spurrier Internal controls are important to organizations, their shareholders, employees and coworkers. One type of internal control is procedures.

1. Ability to Repay (ATR)/Qualified Mortgage (QM)
Synopsis by Deene Spurrier
Lender must make a good faith effort to determine that the consumer has the ability to repay
(Ability to Repay (ATR) rule) the debt for several years into the debt. Factors to be considered:
income, assets, debt, and credit history.
Transactions covered: Residual Mortgage
Qualified Mortgage (QM):
QM are safer, easier to understand and will met the below requirements. QM are presumed to
have met the ability to repay (ATR).
1. Avoid risky features:
a. Negative amortizations
b. Interest only payments
c. Balloon payments. Small lenders are allowed under certain conditions.
d. Loan term longer than 30 years
2. Total monthly Debt-to-Income (DI) ratio including mortgage payment 43% or less
3. Limits points & fees charged by lender:
There are certain legal protections for lenders when showing it ensured
borrower’s had met ATR.
Qualified Mortgage (QM) – Insured depository institutions and insured credit unions with less
than $10 billion in consolidated assets, QM will satisfy the following requirements and will be
deemed complying with ATR:
1. Avoid interest only
2. Avoid negative amortization
3. Prepayment penalty limitations
4. Must consider and document income and financial resources but does not have to
follow Appendix Q of ATR
5. Must retain in loan portfolio
Qualified Mortgage (QM) – Loans eligible to be purchased, guaranteed or insured by VA, USDA
or Fannie Mae and Freddie Mac (“conforming loans”) until 2021 are QM. Loans insured or
quarantined by FHA or HUD are QM.
Points & Fees Loan Amount
3% of >=$107,747
$3,232 >=$64,648
5% of >=$21,549
$1,077 >=$13,468
8% <$13,468

2. Calculating Debt-to-Income (DI):
Income:
Effective income – Income that comes from a source that can be verified, is stable and is
continuous.
Verify employment:
 Employment for most recent two years.
 Explain gaps of 1 or more months.
 Indicate and document whether consumer has been in school or in military for recent
two years.
Seasonal employment – Allowances can be made for seasonal employment, building trade and
agricultural, if documented.
Self employed – Consumer is considered self employed if they have 25 % of more ownership in
a business. Income is considered effective if for two or more years.
Qualifying Types of Income:
Consumer’s income is limited to salaries or wages. Other sources of income may be considered
if verified and documented such as:
 Overtime and bonuses if received for the past two years and documentation does not
indicate likely to cease. An average of overtime and bonuses is to be used.
 Part time and seasonal income if documented received uninterrupted for the past two
years and not likely to cease.
 Commission Income if received for the past two years. Must be documented by copies
of signed tax returns for the past two years and most recent pay stubs.
 Retirement income must be verified from former employer or Federal tax return.
Retirement income that will cease within three years of the mortgage loan is not
qualified income.
 Social Security Income must be verified by a Social Security Administration benefits
letter. Social Security Income that will cease within three years of the mortgage loan is
not qualified income.
 Non-employment income:
 Alimony and child support if likely to be received consistently for
the first three years of the mortgage. Provide required
documentation, a copy of
o Final divorce decree
o Legal separation agreement
o Court order or
o Voluntary payment agreement and

3. Documentation of payments received over the last twelve months
such as:
 Canceled checks
 Deposit slips
 Tax returns or
 Court records
Consumers employed by a family owned business must provide normal
employment verification along with evidence indicating he/she is not an owner,
such evidence of
 Copies of signed tax return or
 Copy of corporate tax return showing ownership percentage
Debts:
Debts to be included:
 Monthly housing expense
 Additional recurring charges extending ten months or more:
o Installment accounts
o Child support
o Revolving accounts
o Alimony
 Debts less than ten months if it will affect the ability to repay mortgage in
months immediately after closing.
Additional analysis details see Appendix Q 1026.43(e)(2)(vi)(B).