Ability to Repay

What It Means

Ability to Repay (ATR) is a federal underwriting standard established under the Dodd-Frank Act and enforced by the Consumer Financial Protection Bureau (CFPB). It requires mortgage lenders to make a reasonable, good-faith determination that each borrower has the financial capacity to repay the loan — based on verified income, assets, debts, credit history, and the loan's terms.

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In a co-buying arrangement, the ATR analysis evaluates each Co-borrower individually, even though the co-borrowers apply jointly. The lender evaluates every signer's financial profile to determine whether the group, as a whole, can sustain the Joint Mortgage payment alongside their existing obligations.

How ATR Applies to Co-buyers

When multiple co-borrowers apply for a joint mortgage, the lender aggregates their combined income for qualification purposes — but also examines each borrower's individual debt-to-income ratio, credit history, and employment stability. A single co-borrower with high existing debt or unstable income can reduce the loan amount the group qualifies for, even if other co-borrowers have strong financial profiles.

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ATR is also relevant to Refinancing scenarios. When a co-owner exits and the remaining co-borrowers must refinance to remove the departing party from the loan, the remaining borrowers must independently satisfy ATR requirements — without the departing co-owner's income. This is a common barrier to Buyout completion.

Why It Matters for Co-owners

ATR requirements affect co-buyers at two critical stages: initial purchase and post-exit refinancing. At purchase, co-buyers should assess whether every intended co-borrower strengthens or weakens the application — and whether removing a weaker borrower from the loan (while keeping them on the Deed) produces a better outcome. At exit, ATR determines whether remaining co-owners can refinance without the departing party.

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The Co-ownership Agreement should account for refinancing feasibility as part of the Exit Strategy — recognizing that ATR requirements may prevent remaining co-owners from qualifying on their own.

Key Points

• Federal standard requiring lenders to verify each borrower can afford the mortgage
• Each co-borrower's income, debts, credit, and employment are evaluated individually
• One co-borrower's weak financial profile can limit the entire group's loan qualification
• Applies at both initial purchase and any subsequent refinancing
• ATR requirements may prevent remaining co-owners from refinancing after a co-owner exits
• Exit strategies should account for refinancing feasibility under ATR standards