I've been researching but am not clear that I understand this correctly . . . from everything I've read, if we do a construction-to-permanent loan, the construction phase must be 12 months or less in order to be exempt from Ability to Repay. If the construction phase is over 12 months, then we must ensure that the construction phase complies with the ATR rules by itself, in addition to underwriting the permanent phase under ATR.

Our lenders want to make the construction phase 18-24 months and not worry about ATR for the construction phase since they will be underwriting the permanent phase under ATR. (Basically, it therefore doesn't matter what your construction phase is.) Am I correct - that the construction phase must still be 12 months or less (with extensions of no greater than 12 months) in order for that phase to be exempt from ATR? Otherwise your construction phase must comply with ATR?

In our area, construction loans typically take 18 - 24 months - so the lenders would like to avoid doing an extension.

Oh, one more question. Does it matter if the construction-to-permanent loan is done as one combined transaction vs. two separate transactions?

Paragraph 1026.43(a)(3)(iii) exempts from the coverage of sections 1026.43(c) through (f) [which covers the ATR requirements] --
"(iii) A construction phase of 12 months or less of a construction-to-permanent loan;" and comment 43(a)(3)-2 further explains:

2. Construction phase of a construction-to-permanent loan. Under § 1026.43(a)(3)(iii), a construction phase of 12 months or less of a construction-to-permanent loan is exempt from § 1026.43(c) through (f). A construction-to-permanent loan is a potentially multiple-advance loan to finance the construction, rehabilitation, or improvement of a dwelling that may be permanently financed by the same creditor. For such a loan, the construction phase and the permanent phase may be treated as separate transactions for the purpose of compliance with § 1026.43(c) through (f), and the construction phase of the loan is exempt from § 1026.43(c) through (f), provided the initial term is 12 months or less. See § 1026.17(c)(6)(ii), allowing similar treatment for disclosures. Where the construction phase of a construction-to-permanent loan is renewable for a period of one year or less, the term of that construction phase does not include any additional period of time that could result from a renewal provision. For example, if the construction phase of a construction-to-permanent loan has an initial term of 12 months but is renewable for another 12-month term before permanent financing begins, the construction phase is exempt from § 1026.43(c) through (f) because the initial term is 12 months. Any renewal of one year or less also qualifies for the exemption. The permanent phase of the loan is treated as a separate transaction and is not exempt under § 1026.43(a)(3)(iii). It may be a qualified mortgage if it satisfies the appropriate requirements.

If you do a two-close construction/perm loan, the construction loan term must be 12 months or less, but can be renewed one or more times for additional terms of 12 months or less. If you do a single-close loan, the construction phase of the loan must be for 12 months or less, and may be extended one or more times for 12 months or less.

Sometimes, you just have to tell the unbelievers to read the regulation and commentary.

Unless the lenders want to figure out how to qualify the construction portion of the loan under the ATR rules, they are just going to have to extend the construction period.

Thank you very much - so helpful!!