“Willing and able” to pay

A lender evaluating a mortgage package considers a buyer’s willingness and capacity to pay. To comply, borrowers applying for a consumer mortgage are evaluated by the lender for their ability-to-repay (ATR), part of Regulation Z (Reg Z), which implements TILA. [12 Code of Federal Regulations §1026.43 et seq.]

Generally, the debt-to-income ratio (DTI) for conventional mortgages, also called the debt-to-income standard, limits the buyer’s:

  • monthly payments for the maximum purchase-assist mortgage, including impounds for hazard insurance premiums and property taxes, to approximately 31% of the buyer’s monthly gross income; and
  • long-term debt, plus the monthly payments, to approximately 41% of the buyer’s gross monthly income. [See RPI Form 229-1, 229-2 and 230]

Lenders use the DTI ratio to evaluate the buyer’s ability to make timely mortgage payments. This is referred to as  buyer mortgage capacity. [See RPI Form 230]

The buyer’s willingness to make mortgage payments is evidenced by the credit report. The credit history demonstrates to the lender whether or not the buyer has a propensity to pay, called creditworthiness.

The DTIs can be adjusted depending on one or more compensating factors, such as if the buyer has:

  • ample cash reserves;
  • a low LTV; and
  • spent more than five years at the same place of employment.