Who can benefit from flexible ATR standards
The ATR rule, imposed by the Dodd-Frank Act, requires us to make a good-faith effort to determine that the applicants have the ability to repay the mortgage and benefit from flexible ATR standards. For borrowers whose financial profiles do not fit the rigid requirements of Qualified Mortgages (QM), the flexible ATR standards applied through Non-QM programs offer a vital pathway to financing.
Who Can Benefit from Flexible ATR Standards (Non-QM Loans)
Flexible ATR standards primarily benefit individuals whose income or financial structure is atypical, making traditional documentation methods—such as W-2s and tax returns—ineffective or exclusionary. These borrowers require alternative documentation (Alt Doc) to demonstrate their capacity to repay.
Self-Employed Individuals and Gig Workers
This group is frequently identified as the prime beneficiary of flexible ATR standards, as their financial profiles often do not align with the strict requirements of conventional loans.
- Self-Employed Professionals and Small Business Owners: Entrepreneurs, sole proprietors, consultants, and small business owners often have varying or irregular income streams. They may write off significant business expenses and deductions, which legally lowers their taxable income but makes their income appear insufficient for a mortgage under traditional, tax-return-based underwriting. Flexible standards allow them to:
- Use Bank Statement Loans: We review 12 to 24 months of personal or business bank statements to demonstrate cash flow and calculate qualifying income. This method verifies the income they actually receive, rather than relying solely on the net income reported on tax forms.
- Use P&L Statement Only Loans: Some programs allow self-employed borrowers to qualify using a Profit & Loss (P&L) statement prepared by a CPA, EA, or licensed tax preparer.
- Freelancers, Gig Workers, and 1099 Contractors: Individuals whose income is sourced independently, such as gig workers and freelancers, represent a rapidly growing segment of the American workforce. Flexible ATR standards allow them to use average monthly deposits instead of relying on inconsistent or seasonal income reported on a tax form.
- Borrowers Paid by Multiple 1099s: These individuals are often qualified as self-employed and benefit from using 12- or 24-months of bank statements for qualification.
High-Asset, Low-Income Individuals (Retirees)
Borrowers who possess substantial wealth but lack a consistent W-2 paycheck benefit greatly from Asset Depletion (or Asset Utilization) programs, a key flexible ATR mechanism.
- Affluent Retirees and Retired Professionals: Individuals who have recently retired, investors living off their portfolios, or high-net-worth individuals without a regular paycheck often have substantial investment portfolios, but little or no verifiable monthly income. Traditional lending relies on W-2s or employment verification, which complicates qualification for these individuals.
- How Flexible ATR Helps: Asset depletion loans convert liquid assets (excluding the dwelling value) into an “Imputed Monthly Income” by dividing the net assets by a fixed term, typically 84 months (seven years) or 120 months (ten years). This imputed income is then used in the DTI ratio calculation.
- Eligible Assets: Acceptable assets include checking/savings accounts, money market accounts, mutual funds, stocks, bonds, and vested retirement accounts.
Real Estate Investors
Investors often seek flexible ATR standards because their personal income may be depressed by tax strategies, but the investment property itself may have strong cash flow.
- Debt Service Coverage Ratio (DSCR) Loans: This program is the ultimate flexible ATR standard, as it often operates under a business purpose loan exemption from the consumer ATR rule. DSCR loans allow real estate investors to qualify based solely on the property’s cash flow, measured by the ratio of gross rental income to the property’s debt obligations (PITIA).
- Tax Strategy Users: Investors can qualify even if they claim significant tax write-offs that lower their personal taxable income.
- Scaling Portfolios: DSCR loans streamline the approval process and typically have no limit on the number of properties an investor can finance, accelerating portfolio growth.
- Short-Term Rental (STR) Investors: DSCR loans are crucial for STR investors (e.g., Airbnb/VRBO) who need to qualify based on the property’s specialized rental income potential rather than long-term lease rates.
- BRRRR Method Investors: DSCR loans allow investors using the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) strategy to refinance quickly (as soon as the rehab is complete) without having to wait for the lengthy mandatory seasoning periods (e.g., one year) often required by conventional loan rules.
Borrowers with Credit or Employment Disruptions
Flexible ATR standards serve borrowers who are temporarily sidelined by traditional lending rules due to recent financial or employment changes.
- Recent Credit Events: Non-QM loans can benefit homebuyers with recent credit events, such as foreclosure, bankruptcy, or short sale that has not been seasoned three years, allowing them to secure financing without waiting for extended periods required by government or conventional loans. This helps them take advantage of current housing market opportunities.
- Borrowers with Recent Job Changes: These individuals may qualify with a strong new income stream even without a full two-year job history.
- First-Time Homebuyers (FTHB): Non-QM loans offer solutions for FTHBs who may not fit conventional guidelines.
Underserved and Specialized Borrower Groups
Flexible ATR standards are utilized to provide financing for specialized situations or demographics typically excluded from conventional lending:
- ITIN Borrowers: Some Non-QM programs (such as the Prime Non-QM Series) offer loans designed specifically for buyers who qualify using an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number.
- Medical Professionals: Specialized Non-QM programs are designed for doctors, dentists, and specialists who may have new or unique income structures (like high debt loads from education).
- Buyers of Non-Warrantable Condos: Non-QM options exist for condominiums that do not meet conventional loan standards, such as those that function as condotels or have high investor concentration.
- Foreign Nationals: These individuals, who may have high income and assets but lack a sufficient U.S. credit history or documentation, can benefit from portfolio loans, which operate under flexible standards. ATR is often calculated using a Debt Service Coverage Ratio (DSCR) or asset-based methods in these programs.
FAQ's
Yes, flexible options are available for specialized property types, such as non-warrantable condominiums (including condotels), which typically do not meet rigid conventional loan standards.
Yes, flexible programs exist for borrowers who qualify using an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number, as well as Foreign Nationals.
Freelancers, gig workers, and 1099 contractors benefit because lenders can use average monthly deposits to qualify them, which is better suited for seasonal or inconsistent income streams than strict W-2 requirements.
Flexible ATR loans often do not require a waiting period after major credit events like bankruptcy or foreclosure, allowing borrowers to purchase properties without waiting for extended seasoning periods mandated by conventional loans.
Yes. Flexible Non-QM standards often allow for higher Debt-to-Income (DTI) ratios, sometimes up to 50% or more, helping borrowers with existing debt or unconventional income qualify when traditional mortgages would not permit it.
Real estate investors can secure financing based solely on the property’s cash flow (Debt Service Coverage Ratio or DSCR) rather than their personal income or tax returns.
Lenders use asset depletion to calculate a qualifying imputed monthly income by amortizing net assets (like stocks, savings, or retirement funds) over a fixed term.
High-net-worth individuals, including affluent retirees and investors living off their portfolios, can qualify by demonstrating their substantial investment portfolios instead of a regular paycheck.
They allow self-employed individuals to qualify using alternative documentation, such as bank statements, to show cash flow instead of relying on tax returns, which often reflect lower net income due to business write-offs and deductions.
Self-employed borrowers who earn their income in a non-traditional manner, such as small business owners, consultants, or sole proprietors.
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