A member wants to build a new home while continuing to live in—and eventually sell—their current residence. When we underwrite construction loans, we always assess the long-term takeout (permanent financing) as part of the approval process.
Are there circumstances where we can exclude the member’s current mortgage from the debt ratio calculation, or must they sell their home before starting the construction?
Under Regulation Z, certain construction loans are exempt from the Ability-to-Repay (ATR) requirements, which may offer some flexibility. Specifically, temporary or short-term loans with terms of 12 months or less, or the initial construction phase (12 months or less) of a construction-to-permanent loan, are not subject to ATR rules.
If the loan qualifies as exempt, you are not required to evaluate the member’s ability to repay under the standard ATR framework—meaning the current mortgage payment may be excluded when calculating qualifying debt ratios.
The official commentary to Regulation Z provides helpful clarification on this exemption and how it applies to construction lending.
For more information, email Heather Line.
Your League-member benefits include the Compliance Hotline — providing exclusive access to dedicated compliance experts:
Using the above phone number and email address, you can gain access to a knowledgeable team that’s ready to address all your credit union’s compliance inquiries — promptly and efficiently. With the Compliance Hotline, you can proactively respond to impromptu questions and issues by getting clarity and insight on technical topics that normally slow you down. We want to help you unlock the full potential of your League membership by leveraging the resources and support you need to navigate the complex world of compliance effortlessly. We’re ALWAYS just a phone call or email away!
Additionally, other League-member compliance resources include:
For more information, email Lisa Quaranta.
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