ABILITY-TO-PAY
On January 10, 2014 the Consumer Financial Protection Bureau’s “Ability-to-Repay” law went in effect. This law governs residential hard money loans and lenders as well as residential investment and subprime mortgage loans and lenders.
The law requires a small lender to have “third-party proof” that a borrower has enough “residual income” to repay their loan (including principal, interest, taxes and insurance). Third party proof would include Form 1040 Individual Tax Returns that are prepared by a third-party, 1099’s, or W-2’s as an example.
One way of proving one’s “ability to repay” is to have the borrower’s CPA prepare a Profit & Loss Statement for the last two years and a year to date P&L Statement for the current year.
Few residential lenders in the greater Houston area are aware of this method of determining one’s ability to repay and this information may help potential residential investor borrowers qualify for a new home purchase from a subprime lender.
If an investor is having a difficult time qualifying for a loan, he or she should consider having their accountant prepare a Profit & Loss Statement.
If one does not have tax returns, 1099’s or W-2’s, one could provide two years of bank statements to prove up their income.
In the expense section of the P&L statement, one should include all monthly payments (e.g., car payments, credit card payments, child support payments, bank or finance company payments, student loan payments, mortgage payments, rent payments, etc.) And one should include an average spent on utilities, groceries, property taxes, home repairs, car repairs, entertainment, dining, etc., to obtain a residential hard money or subprime mortgage loan.
While the law requires this, we believe it is a good law. One should not buy a home if there is any doubt that one does not have enough “residual income” to repay their loan to a hard-money lender including the monthly principal, interest, taxes and insurance.
If one does not have enough money left over each month (after paying all other expenses) to repay their loan to a subprime lender; that is a mistake for both the lender and the borrower. No one wins if one does not have the ability to repay their residential loan.
The law also requires that subprime borrowers take a pre-purchase counseling course. One will find this helpful in deciding if financing a residential hard money loan from a subprime lender is a wise decision.
The following website will help you with that decision: http://www.consumerfinance.gov/find-a-housing-counselor/.
We are a Houston based hard-money lender and we’ve helped many families and individual investors realize their dream of owning their own home.
While we’re in the business of financing residential for individuals and families, we’re a “soft-hearted lender” when it comes to helping one realize their dream of homeownership.
We charge nothing for offering advice on how to help you qualify for a loan. It’s our way of helping our community with homeownership.
Please contact us and let us know your specific loan needs. Our hard money loan interest rates start at 12%, and we can do a lot to help you find the right solution for your specific residential loan needs.
