I am trying to determine if a short-term construction only loan would have to be treated the same as a balloon loan for ATR purposes. I am specifically talking about a construction only loan with a term greater than 12 months (12 months or less is exempt). These loans typically were extinguished by permanent financing in the past, but I don't believe you can make that assumption based on the ATR guidelines. It appears as though you are not allowed under the new rules to utilize a longer amortization period for calculating the repayment ability on these loans (i.e., you cannot use a 360 amortization on a 24 month loan). It appears that the result whether intended or not is for these loans to be treated like a balloon loan. This essentially eliminates any construction loans with a term greater than 12 months. For example, you would have to make the ATR determination based on 24 equal payments (24 month construction only) that will fully repay the loan. Am I correct in my interpretation?

(2) Fully amortizing payment means a periodic payment of principal and interest that will fully repay the loan amount over the loan term.

(5) Payment calculation. (i) General rule. Except as provided in paragraph (c)(5)(ii) of this section, a creditor must make the consideration required under paragraph (c)(2)(iii) of this section using:
(A) The fully indexed rate or any introductory interest rate, whichever is greater; and
(B) Monthly, fully amortizing payments that are substantially equal.

I would make it for 12 months or less and refinance if it takes longer than 12 months.

I would not recommend such a policy, if you are aware that a given loan will take more than 12 months in its construction completion. It will look like a deliberate attempt to skirt the regulation's requirements.

I would agree with that as well. You should not be structuring a loan you know will take longer than 12 months to complete just to evade the requirements. This is exactly why I posed the question in the first place. Any thoughts?

I was hoping to get some feedback on my initial post. This should be an issue that a number of people will have to address.

I think your analysis is sound in the OP.

I am not sure if this was the intent or just an oversight, but this will make it practically impossible for anyone to qualify for a construction-only loan with a term greater than 12 months.

Must be one h*ll of a dwelling if a contractor can't build it in 12 months