What does "Ability-to-Repay rule" mean?

Definition

The ability-to-repay rule requires lenders to confirm that you can afford to repay a loan before they issue it. They check your income, assets, and credit to ensure you can handle the payments.

Why the Ability-to-Repay rule exists

Before the 2008 housing crisis, many loans were approved without verifying whether borrowers could afford the payments. Congress responded with the ATR rule in 2010, making lenders legally responsible for confirming you have enough income to manage the mortgage. If a lender ignores the rule, you may have legal grounds to challenge the loan—an uncommon but powerful consumer protection.

People Want To Know

How is the ability to repay calculated?

Lenders calculate the ability to repay by assessing your debt-to-income (DTI) ratio, which should not exceed 43%. They evaluate your gross monthly income, monthly debts, and other financial factors, including credit score and assets. A stable income history for at least two years is also considered essential for approval.

What is 1026.43 C ability to repay?

1026.43 C of the Ability-to-Repay rule mandates that lenders must verify a borrower's ability to repay a mortgage loan. Lenders assess income, assets, credit history, and existing debt to ensure borrowers can manage monthly payments without financial strain.

Which loans are exempt from ability to repay requirements?

Loans exempt from ability-to-repay requirements include certain qualified mortgages (QMs), such as small-dollar loans, loans with a balloon payment, and loans made by creditors with a strong history of compliance. Additionally, loans for investment properties and certain temporary loans may also be exempt.

Which income must be verified by lenders under the ability to repay rule?

Lenders must verify all sources of income that contribute to your ability to repay the loan. This includes salary or wages, bonuses, overtime, self-employment income, rental income, and any other consistent income sources, such as alimony or child support.

Flip the Script - Master mortgage objections

More From The Mortgage Glossary

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage, or ARM, has an interest rate that changes over time. It starts with a fixed rate, and after that, the rate can go up or down based on market conditions.

Amortization

Loan amortization is how your mortgage payments are divided between paying off the loan's principal and interest over time. Early on, more of your payment goes to interest, and later, more goes toward the principal.

Annual Percentage Rate (APR)

The annual percentage rate, or APR, is the total cost of borrowing money. It includes the interest rate plus any additional lender fees, giving you a more complete picture of the loan’s cost.