VA loans join other types of home loans as of January 10th, 2014 regarding a new lending statute laid down by the Consumer Finance Protection Bureau, or CFPB. Although VA loans historically have had the lowest default rate compared to any other mortgage program, including Fannie Mae, Freddie Mac, FHA and USDA loans, VA lenders must still employ a new lending rule called the Ability to Repay, referred to by mortgage lenders as ATR.
During the housing crisis of the last decade, a certain class of loan programs, not VA mind you, began to grip the mortgage industry. These alternative mortgage loans did not require the lender to verify certain aspects of the loan application, including some very important parts such as having any money for a down payment or being able to document any income. The borrower may very well have made $10,000 per month but didn’t have to prove it. The lender just assumed it.
We all know what happened next but the CFPB has done what it can to make sure those programs never see the light of day again. The ATR provision requires a lender to determine affordability and specifies a particular debt to income ratio as well. A borrower’s debt ratio cannot exceed 43 percent of gross monthly income. If the borrower did make $10,000 per month, no more than $4,300 could be allocated to monthly debt, including the new mortgage payment.
For the past year, mortgage lenders everywhere began a spat of hand-wringing wondering how it would impact mortgage lending and keeping some borrowers from financing a home. Yet the ATR rule should have minimal, if any effect on VA loans. That’s because VA mortgages have always had the requirement to determine affordability and the maximum debt ratio is 41, actually lower than the ATR rule. For VA borrowers who are hearing about the new ability to repay rule and how it might affect their borrowing position, there’s really nothing to be concerned about.