We do not do long term interest only loans. However on rare occassion we have made a short term interest only loan with a Balloon payment.

Example: $10,000 24 month Interest Only at 5.00% (2 yr Int Only Balloon)

How do I calculate the payment for payment underwriting?

Do I divide the $10,000 into 24 equal P&I installments?
Or do I calculate the maximum interest only payment for DTI and also consider that the customer can make the Balloon payment of $10,000 at the end (e.g. the customer has $50,000 in liquid assets)

Or is this loan not possible?

Just my opinion - yes this type of loan is possible under Ability to Repay but certainly not a QM.

When evaluating the Ability to Repay, what is the take out source? I do not think you can look to a monthly payment. Also, somewhere I read where the ability to refinance is not considered viable source of repayment. If they do not have the overall assets and liquidity to repay the loan at maturity, my opinion is you may be in violation of ATR. Personally, I would avoid these going forward.

IMO an interest only loan due at maturity is a balloon loan. So you could make an ATR compliant balloon loan if the term of the loan is more than 5 years from the date of the first payment. Or, if the loan will be an HPCT, you'll need to ensure the borrower can repay the balloon amount, too.

What is a HPCT? Sorry, my brain is mush.

So, all interest only loans (interest only that never go to a P&I phase) will now have to be either five years or customer has the ability to pay the balloon depending on if HPML balloon or not?

Higher priced covered transaction (defined in 1026.43(b)).

Yes, if the loan is a consumer credit transaction that is secured by a dwelling, other than those excluded from the ATR requirements under .43(a)(1) - (3).