Do Alt Doc Loans Need to Meet ATR Requirements?
The clear answer from regulatory standards and industry guidelines is generally yes, Alt Doc loans need to meet ATR requirements.
Alt Doc loans, which include products like Bank Statement loans and Asset Utilization/Depletion loans, fall under the umbrella of Non-Qualified Mortgages (Non-QM). While Non-QM loans offer flexibility by not adhering to the rigid standards of Qualified Mortgages (QM), they must still satisfy the foundational requirement for responsible lending established by the Dodd-Frank Act.
The General Obligation to Determine ATR
The core of the ATR requirement is the obligation imposed on us to make a good-faith effort to determine that the applicants have the ability to repay the mortgage.
- Mandatory Assessment: Specific Non-QM product series, such as the Non-QM Advantage product series, require an Ability-to-Repay (ATR) assessment for all loans. Similarly, the Prime Non-QM Series requires an ATR assessment for all loans.
- Regulatory Basis: All Covered Loans must be designated as ATR compliant and adhere to the standards set forth in the CFPB’s Regulation Z, Section 1026.43(c).
- Scope: Non-QM loans are often specifically used for borrowers who may have difficulty documenting income via traditional methods (W-2s, tax returns), making them reliant on Alternative Documentation. This flexibility in documentation does not waive the ATR mandate.
How Alt Doc Methods Meet ATR
Since Alt Doc loans bypass traditional W-2s and tax returns, the ATR requirement is met by substituting that documentation with verified alternatives that establish capacity and repayment ability. The underwriter’s analysis of the borrower’s ability to repay the mortgage debt must be reasonable and based on documented income and assets that have a reasonable expectation of continuance.
Alternative Documentation (Alt Doc) is defined by some investors as any loan qualified with 1099, bank statement income, or asset amortization income.The eight minimum underwriting considerations are:
| Alt Doc Type | ATR Compliance Method | Supporting Source Details |
| Bank Statement Loans | We reviews consecutive months of personal or business bank statements (typically 12 or 24 months) to determine the average monthly deposits and calculate cash flow. This calculated income is then used in the Debt-to-Income (DTI) ratio to demonstrate the capacity to repay. The borrower’s income source must be verified by a third party and establish a reasonable expectation that it will continue. | Bank statement loans are designed for self-employed borrowers who may not qualify with tax returns. Loans using Bank Statements must document the eight ATR rules. |
| Asset Utilization/Depletion | This method leverages a borrower’s liquid assets (stocks, retirement funds, savings) to calculate an imputed monthly income, often by amortizing the net asset balance over a long term (e.g., 84 or 120 months). This calculated income is then used in the DTI ratio to determine the ability to repay. | The utilization of financial assets is explicitly considered as borrower income to qualify for their monthly payments under the Asset Depletion program. For the Asset Qualifier program, assets are used to calculate residual income. |
| P&L Statement Only | Qualifying income is derived from a Profit and Loss (P&L) statement prepared by a Certified Public Accountant (CPA), Enrolled Agent (EA), or licensed tax preparer. The net income from the P&L, divided by 12 months and multiplied by the borrower’s ownership percentage, is used as the qualifying income in the DTI ratio. | The P&L must be prepared by a licensed Tax Preparer and requires supporting documentation. This method is typically available for self-employed borrowers with a minimum ownership interest. |
Exceptions to the ATR Requirement
There is one major exception in the Non-QM space where ATR assessment is generally not required: business purpose loans, most notably the Debt Service Coverage Ratio (DSCR) program.
- DSCR Exemption: DSCR loans are specifically for investment properties and are typically structured as business purpose loans. Loans deemed strictly for business purposes are generally exempt from ATR, QM, and HPML requirements.
- Qualification Basis: In the DSCR program, qualification is based solely on the property’s debt service coverage ratio (DSCR), which compares rental income to property expenses (PITIA), rather than verifying the borrower’s personal income or DTI.
- Documentation Difference: For DSCR loans, no personal income or employment is verified, and no DTI is developed. For these loans, the ATR analysis requirement is explicitly excluded.
FAQ's
Under some guidelines, asset depletion is not supplemental and must be used as the sole source of income, though other income sources may be considered on a case-by-case basis.
DSCR (Debt Service Coverage Ratio) loans are typically exempt from ATR because they are structured as business purpose loans for investment properties.
The borrower must be qualified using a simulated fully amortizing payment over the remaining amortization period (e.g., 20 or 30 years), not the lower Interest-Only payment.
Lenders calculate the borrower’s Debt-to-Income (DTI) ratio. Alt Doc programs typically allow a maximum DTI ratio up to 50%.
Asset depletion programs satisfy ATR by counting qualified liquid assets (like investments or retirement accounts) as a source of income to qualify for monthly payments.
Yes, Bank Statement loans must meet and document the eight Ability to Repay (ATR) rules.
Lenders determine the borrower’s capacity to repay by analyzing 12 or 24 months of personal or business bank statements to establish cash flow and qualifying income.
All loans subject to Regulation Z must comply with the ATR rule provisions outlined in the Truth in Lending Act.
The Dodd-Frank Act imposed the obligation on lenders to make a good-faith effort to determine that the applicants have the ability to repay the mortgage.
Yes, Alt Doc loans are a type of Non-Qualified Mortgage (Non-QM) and must generally satisfy ATR requirements.
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