Ability-to-Repay and Qualified Mortgage rule: eight factors, the APR test, the 3% cap

Since 2014 a lender must verify that you can actually repay a mortgage; a “qualified mortgage” is the lender’s reward for following a defined recipe, and your signal that the loan has no traps.

The Ability-to-Repay rule is the part of the Dodd-Frank Act of 2010 written most directly in response to the stated-income, negative-amortization loans of the 2000s. It took effect on January 10, 2014 as section 1026.43 of Regulation Z. The idea is two-sided. Every lender making a covered mortgage must make a reasonable, good-faith determination that the borrower can repay it. A lender that makes a qualified mortgage — a loan without risky features, within a price and fee limit — receives legal protection from the claim that it failed to do so. The rule was substantially revised in 2021, when the old 43% debt-to-income ceiling was replaced by a pricing test.

Coverage and exemptions

ATR applies to closed-end consumer credit secured by a dwelling, including second homes and consumer-purpose loans on investment property you partly occupy. It does not apply to:

home equity lines of credit and reverse mortgages;
temporary or bridge loans with a term of 12 months or less, and the construction phase of a construction-to-permanent loan of 12 months or less;
loans by state housing finance agencies, and certain loans by community development lenders, non-profits and emergency programs;
business-purpose loans, which are outside Regulation Z altogether, including most hard money and investor loans;
timeshare plans.

The eight underwriting factors

Outside the qualified mortgage path, a lender may use any reasonable underwriting method, but it must consider and verify, using third-party records, at least these eight items:

current or reasonably expected income or assets (other than the value of the home itself);
current employment status, if employment income is relied on;
the monthly payment on the loan, calculated at the fully indexed rate on a fully amortizing schedule;
the monthly payment on any simultaneous loan secured by the same property;
monthly mortgage-related obligations: property taxes, insurance, HOA dues, ground rent;
current debt obligations, alimony and child support;
the monthly debt-to-income ratio or residual income;
credit history.

“Verify” is the operative word: pay stubs, W-2s, tax transcripts, bank statements, a credit report. The rule does not set a maximum DTI for a non-QM loan, and since 2021 it does not prescribe a documentation standard either (the old Appendix Q was removed); it requires a reasonable judgment that can be defended.

What makes a loan a qualified mortgage

A General QM must have no negative amortization, interest-only period or balloon payment, a term of 30 years or less, and points and fees of no more than 3% of the total loan amount for loans at or above an indexed threshold (roughly $130,000, adjusted each January; higher percentages apply on a sliding scale to smaller loans, up to 8% below about $16,000). The lender must consider and verify income, assets, debts and DTI using the eight factors. And the price must fit: the APR may not exceed the average prime offer rate (APOR) for a comparable transaction by more than 2.25 percentage points on a first lien at or above the indexed loan-size threshold (higher spreads are allowed for smaller loans and subordinate liens). The 43% DTI cap that defined QM from 2014 to 2021 is gone, and the temporary “GSE patch” for Fannie Mae and Freddie Mac loans expired with it.

The legal protection comes in two strengths. A QM with an APR less than APOR plus 1.5 points is a safe harbor: the borrower cannot claim an ATR violation. A QM priced between 1.5 and 2.25 points over APOR carries only a rebuttable presumption: the borrower may still prevail by showing that, at consummation, income left after the mortgage and debts was insufficient to meet living expenses. Other QM categories exist — small creditor portfolio QMs for lenders under an asset threshold holding loans in portfolio, balloon QMs in rural areas, and the 2021 seasoned QM for loans held 36 months with no more than two 30-day delinquencies and no 60-day delinquency.

One more feature tracks QM status: a prepayment penalty is permitted only on a fixed-rate qualified mortgage that is not a higher-priced loan, limited to three years and to 2% of the prepaid amount in years one and two and 1% in year three, and only if the lender also offered a loan without one.

What the rule does not do

It does not set a universal maximum DTI; a non-QM loan at 50% DTI is lawful if the lender documented its reasoning. It does not guarantee that a qualified mortgage is the cheapest loan or that you will be approved for one. It does not apply to the investor loans where “no income verification” is common, because those are business-purpose. And a loan labeled non-QM is not an illegal loan; it is a loan on which the lender carries the full burden of proving it checked your ability to pay.

Enforcement and remedies

The CFPB and prudential regulators examine for compliance. A borrower who proves an ATR violation may recover actual damages, statutory damages, and all finance charges and fees paid in the first three years of the loan, plus attorney’s fees. The statute of limitations is three years from the violation for an affirmative suit — but the violation may be raised as a defense by recoupment or set-off in a foreclosure at any time, which is the provision that makes the rule matter most to borrowers in trouble.

How to read your own loan through ATR/QM

Ask the lender whether the loan is a qualified mortgage, and if not, why. Look at the Loan Estimate for interest-only, balloon or negative amortization features and for a prepayment penalty. Compare the APR with the APOR for your lock week (the tables are published by the Federal Financial Institutions Examination Council); a spread above 2.25 points means you are outside General QM and likely paying for risk the rule expects a lender to document. If a lender proposes to “state” income you do not have, or sets the payment on an introductory rate, that is the fact pattern the rule was written to stop. Details on how lenders calculate the ratios are in our DTI guide and affordability guide; the CFPB’s Regulation Z text is the primary source.

Key points

Dodd-Frank 2010; effective January 10, 2014 as Regulation Z 1026.43; rewritten in 2021 to replace the 43% DTI cap with an APR test.
Exempt: HELOCs, reverse mortgages, bridge and construction loans of 12 months or less, HFA loans, business-purpose loans.
Eight factors must be considered and verified with third-party records, including DTI or residual income and credit history.
General QM: no negative amortization, interest-only or balloon, term 30 years or less, points and fees 3% or less (loans above an indexed threshold near $130,000).
Price test: APR no more than APOR + 2.25 points on most first liens; safe harbor below APOR + 1.5, rebuttable presumption between.
Prepayment penalties only on fixed-rate, non-higher-priced QMs: 3 years maximum, 2%/2%/1%, with a no-penalty alternative offered.
Seasoned QM after 36 months of performance; small creditor and balloon QMs for portfolio lenders.
Remedies: actual and statutory damages plus three years of finance charges; 3-year limit to sue, but recoupment in foreclosure at any time.

How ATR / QM applies to you

Frequently asked questions

Is the 43% debt-to-income limit still part of the qualified mortgage rule?

No. From 2014 to early 2021 the General QM required a DTI of 43% or less. The CFPB replaced it with a price-based test: the APR may not exceed the average prime offer rate by more than 2.25 percentage points on most first-lien loans. Lenders must still consider and verify DTI or residual income, and Fannie Mae and Freddie Mac keep their own DTI guidelines, typically up to 45% to 50%.

Is a non-QM loan a bad loan?

Not necessarily. Non-QM means the loan does not fit one of the qualified mortgage definitions, often because of bank-statement income documentation, a high DTI, interest-only payments or a larger fee. The lender still must determine your ability to repay using the eight factors and carries the full burden if challenged. Read the features and price carefully; the label tells you to ask more questions, not to walk away.

Does the ability-to-repay rule apply to hard money or DSCR investor loans?

Generally not. Loans primarily for business purposes, including most loans to buy, fix or hold rental property the borrower does not occupy, fall outside Regulation Z and therefore outside ATR/QM. That is why such lenders can underwrite on the property’s cash flow without verifying personal income. A consumer-purpose loan disguised as business-purpose remains covered, and the classification can be challenged on the facts.

What can I recover if a lender violated the ability-to-repay rule?

Actual damages, TILA statutory damages, all finance charges and fees paid during the first three years of the loan, and attorney’s fees, in a suit filed within three years of consummation. Beyond that period you may still raise the violation as a defense by recoupment or set-off if the lender or its successor forecloses or sues on the note. Consult a consumer attorney in your state about how courts there apply it.