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Complete Full Cash Flow? Ability to Repay Rules

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We currently have a consumer in the permanent financing phase of a construction/permanent loan. There was no guarantee we would provide the permanent financing at our bank. When construction was approved the borrower was considered self-employed. He owned two businesses and within the last year has sold a large portion of his businesses and now receives a salary as a manager, rather than an owner. Do we need to complete a full cash flow on this borrower, or could we use the current income received from his salary for ability to repay rules?

The answer to some extent depends on whether you are underwriting ATR using Appendix Q (QM), underwriting using Fannie/Freddie eligibility criteria (QM), or underwriting using the Reg Z eight factors (non-QM). Also, to what extent might his cash reserves have increased as a result of the sale of the two businesses? Reg Z requires ATR be determined by a combination of income and assets.

First published on 02/10/2019

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