The ATR has added another layer of responsibility on lenders above and beyond meeting guideline-specific program requirements. ATR has eight specific underwriting factors all lenders must consider on residential mortgage loans. That’s an important distinction, as it adds a layer of lender responsibility previously not there. For example, years ago Fannie Mae and Freddie Mac were purchasing loans that contained very little income or asset documentation, these were often referred to as “liar loans.” If Fannie Mae and or Freddie Mac decided to loosen guidelines, lenders were still required to meet ATR rules. So regardless of any of the loan purchasers’ or guarantors’ documentation desires, the overarching federal rule dictates underwriting factors and subsequently the documentation necessary to meet the law’s requirements.
This is critical for loan originators, Realtors®, and most importantly home buyers to understand. Loan originators and Realtors® can greatly facilitate the smoothness of a home purchase transaction by setting proper expectations at the very beginning of the purchase process. In the past, many loan originators would only begin to gather documentation after a purchase contract had been executed. In today’s environment that approach could lead to trouble, as often times the buyer’s understanding of what is considered proper documentation may not meet the lender’s standards now being dictated on a federal level.
The “documentation dance” starts when buyers supply documentation that results in additional documentation being required. Here’s a typical scenario in today’s loan environment. Home buyer supplies loan officer with a bank statement that has a “large deposit.” This deposit is clearly not related to employment, i.e. stems from a deposited check or cash. One of the ATR rules is to document current debt obligations. People can borrow money from sources (friends/family/acquaintance) that won’t report on credit. As such, the lender will require proof of where the money came from and document that there isn’t a financial payment related to those monies. This can lead to needing gift letters, or adding debt to a buyer’s credit report, or any number of documentation issues and requirements.
The best approach is to work with one another with a sense of urgency and supply whatever documents are requested as quickly as possible. Additionally, understand it’s necessary to be up front and honest about requests as underwriting will get to the bottom of whatever questions arise.
Finally the ATR rule applies to all “residential mortgages.” This is important to note as there’s no lessening of underwriting factors as it pertains to loan size. In other words, lenders are required to document a $40,000 mortgage the same as they would a $400,000 mortgage.
For more information on ATR and QM you can see previous blog postings here: