by C/A Staff
The COVID-19 pandemic has brought waves of people filing new claims for unemployment benefits each week. As we emerge from this health crisis, we will undoubtedly be dealing with the pandemic’s effects for some time. Because of the rise in unemployment claims, it may be worthwhile to review the use of unemployment benefits when qualifying for a mortgage.
As a general rule, a lender cannot originate a dwelling-secured loan before it makes a reasonable and good faith determination that the applicant will be able to repay the loan. The ability-to-repay (“ATR”) regulation gives us a safe harbor in the form of the Qualified Mortgage. Regulators created multiple types of Qualified Mortgages and placed certain restrictions on the terms of each. If lenders meet these conditions, the loan is presumed to comply with the ATR rules. Our ATR/QM Matrix shows the different options and criteria. Lenders may use this checklist to confirm a loan satisfies the requirements for a General Qualified Mortgage. Small creditors may use this checklist to confirm they are making a Qualified Mortgage.
When making a Qualified Mortgage, a lender must use Appendix Q to Regulation Z to confirm the applicant’s current or reasonably expected income. The lender uses the criteria in Appendix Q to establish that at the time of closing the loan, the applicant’s total monthly debt does not exceed 43 percent of his or her total monthly income. When outlining the applicant’s income that the lender can reasonably expect during the loan, Appendix Q’s watchwords are “stability” and “predictability.” Before it may count an income stream, the lender must be able to document that the income stream has existed for some time and that it is reasonable to conclude that it will continue.
For unemployment income, Appendix Q says that the lender must document that the unemployment income has existed for two years, and have reasonable assurance that this income will continue. As unemployment benefits in most states last only up to 26 weeks, this requirement will eliminate counting unemployment benefits for most borrowers. There are, however, times when lenders may count unemployment income when making a Qualified Mortgage.
Appendix Q tells us, “this requirement may apply to seasonal employment.” There are fields of employment where it is customary for employees to be laid off at certain times of the year or between contracts. In jobs featuring consistent unemployment, such as construction or contracting, where shutdowns are frequent, or other seasonal employment may also create a situation where these workers consistently supplement their overall income with unemployment benefits. In these cases, a lender may consider the unemployment income, as long as it can demonstrate the consistency and predictability Appendix Q requires.
Compliance Alliance offers many tools to help you navigate the ATR and Qualified Mortgage rules in our ATR QM Toolkit. We also provide a webinar to help train your team. As always, feel free to contact us on the Hotline, with any specific questions.