How do you meet atr requirements for asset depletion loans
Compliance with the Ability-to-Repay (ATR) Mandate
Asset Depletion loans are loans that must meet the ATR requirements for Asset Depletion Loans. Since these loans are typically secured by consumer residential real estate, they are subject to Regulation Z, Section 1026.43(c) provisions of the Truth in Lending Act.
To meet the ATR rule, we must make a good-faith effort to determine that the applicants have the ability to repay the mortgage. For Asset Depletion loans, this determination is achieved by converting liquid assets into an imputed monthly income stream, thereby fulfilling the first requirement of the General ATR Option.
The Eight Minimum ATR Considerations
Underwriters must assess the borrower’s capacity based on the eight minimum underwriting considerations defined under the General ATR Option, primarily focusing on the ability to determine:
- Income or Assets: The consumer’s current or reasonably expected income or assets.
- Debt-to-Income (DTI) or Residual Income: The consumer’s monthly debt-to-income ratio or residual income.
- Credit History: The consumer’s credit history.
Meeting ATR Through Income and Capacity Calculation
The key mechanism for meeting the ATR requirement in asset depletion underwriting is the formal calculation of “Imputed Monthly Income” (ATR Factor 1).
A. Asset Depletion (DTI Required)
In the standard Asset Depletion model, the utilization of financial assets is considered as borrower income to qualify for their monthly payments.
1. Calculating Imputed Monthly Income: The qualifying monthly income is calculated by dividing the Net Qualifying Assets by a fixed term. This method is used to prove sufficient income even without regular employment earnings.
- Standard Formula (Asset Depletion): Net Qualifying Assets / 84 Months = Imputed Monthly Income. This is based on a utilization draw schedule of seven (7) years.
- Passive Asset Utilization: Under certain guidelines, borrowers with accumulated liquid assets who do not wish to set up formal distributions may qualify by dividing their assets by a 10-year (120 month) term.
- Alternate Terms: Some guidelines use other amortization periods for calculation, such as 36 months or 60 months. For instance, one program calculates income over 60 months when the DTI without asset utilization is above 60% or when assets comprise the borrower’s entire income.
2. Calculating Debt-to-Income (DTI): Once the imputed monthly income is established, it is used in the DTI ratio to demonstrate capacity (ATR Factor 7).
- DTI Limit: Although the DTI ratio must generally be 43% or lower for traditional QM loans, Non-QM programs often allow a maximum DTI of up to 50%.
- Interest-Only (I/O) Loans: If an I/O feature is involved, the qualifying payment used for the DTI calculation must be a simulated fully amortizing payment over the remaining term, rather than the lower interest-only payment.
B. Asset Qualifier (DTI Not Developed)
Some programs offer an “Asset Qualifier” option, primarily for owner-occupied properties, which modifies the ATR approach to capacity:
- DTI Exemption: For the Asset Qualifier product, no DTI is developed.
- Residual Income Requirement: Instead of a DTI, ATR is met by calculating the Residual Income. This calculation takes the available assets and divides them by 60 months, then subtracts the total monthly debts.
- Minimum Threshold: The resulting residual income must meet or exceed a specific minimum, such as $1,300 per month.
Verification of Assets and Other ATR Factors
To ensure the calculation accurately reflects repayment ability, rigorous documentation and verification of the underlying assets and credit profile are required.
A. Eligible Assets and Verification
Underwriters must verify the assets used for the calculation (ATR Factor 1 – Assets).
- Required Asset Types: Acceptable assets generally include Checking/Savings accounts (100% face value), publicly traded Stocks/Bonds/Mutual Funds (often weighted at 80%), and Vested Retirement Accounts (often weighted at 70% to 80%, depending on the borrower’s age and access).
- Asset Seasoning: Qualified assets must typically be seasoned for a minimum of 90 days (i.e., three months of consecutive statements) in a U.S. bank or financial institution.
- Exclusions from Net Assets: Before calculation, funds needed for the down payment, closing costs, and required reserves must be excluded. Ineligible assets include business assets, foreign accounts (if unseasoned), restricted stock, and gift funds.
B. Credit History and Liabilities (ATR Factors 6 & 8)
Other key ATR factors relating to the borrower’s willingness to repay must be documented:
- Credit Score: A strong credit score is typically preferred. Programs often require a minimum of a 680 or higher FICO score.
- Liabilities: The underwriter must accurately document and include all monthly payment obligations, including current debt, alimony, and child support, in the DTI or residual income calculation.
- Reserves: While some programs indicate that reserves are not required when asset utilization is the sole source of income, Alt Doc loan guidelines typically require reserves, often 6 months of PITIA (Principal, Interest, Taxes, Insurance, HOA).
C. Program Restrictions
ATR requirements are also met by ensuring the loan structure adheres to strict limitations for Asset Depletion programs:
- Ineligible Transactions: Asset Depletion and Asset Qualifier loans are typically not eligible for Cash-Out Refinance transactions.
- Income Blending: Under some program guidelines , asset depletion cannot be combined with other income sources; it must be used as the sole qualifying method. However, some guidelines allow it to be used as a supplemental income source.
- Occupancy: Asset Depletion/Asset Qualifier programs are often restricted to Owner Occupied (OO) or Primary Residence transactions only.
FAQ's
Under some program guidelines, asset depletion is not supplemental and must be used as the sole source of income; it cannot be combined with other employment income.
The Asset Qualifier product uses assets to calculate residual income, which must meet a specific minimum threshold (e.g., $1,300 per month) to satisfy ATR.
While traditional loans cap DTI at 43%, Non-QM programs typically allow Asset Depletion borrowers to qualify with a DTI of up to 50%.
Yes, vested retirement accounts (such as 401(k) or IRA) are considered eligible assets, although they are often discounted to 70% or 80% of their vested value.
Funds needed for the down payment, closing costs, and required reserves must be excluded from the Net Qualifying Assets.
Qualified assets must be seasoned for a minimum of 90 days (or three months) and located in a U.S. bank or financial institution.
The imputed income is used in the Debt-to-Income (DTI) ratio calculation to confirm the borrower’s capacity to repay the mortgage.
The formula usually involves dividing the Net Qualifying Assets by a fixed term, often 84 months (representing seven years).
They fulfill the income requirement (ATR Factor 1) by utilizing financial assets to calculate an imputed monthly income for the borrower.
Yes. Asset Depletion loans are a form of Non-Qualified Mortgage (Non-QM) and are specifically designed to meet the Ability-to-Repay (ATR) requirements.
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