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Appendix Q requires, among other things, that balloon payment notes that come due within 1 year of loan closing must be considered in the underwriting analysis. Is there a formula that describes (dictates) how such balloon loans must be considered? How is a creditor to know?
From my reading of the regulation/Appendix Q, you’re going to need to consider the balloon payment similar to how you would consider simultaneous loans under the general ATR rules.
For purposes of calculating the debt-to-income ratio in§ 1026.43(e)(2)(vi), creditors must include in the definition of “debt” a consumer’s monthly housing expense. This includes, for example, the consumer’s monthly payment on the covered transaction (including mortgage-related obligations) and on simultaneous loans.
Section 1026.43(e)(2)(v)(B) requires creditors to consider and verify the consumer’s current debt obligations, alimony, and child support. For purposes of this requirement, the creditor must consider and verify, at a minimum, any debt or liability specified in appendix Q.
So the creditor must consider and verify all of the consumer’s debts, but only certain of those debts are included in the debt-to-income ratio.
• This appears the case with a balloon, that is not a simultaneous loan, coming due in 12 months. You must consider the impact of that debt on the borrower’s ability to repay. For example a consumer that has applied for a covered transaction could have an acceptable debt-to-income ratio of 40%, and the ability to pay the regular monthly payments on a loan with a big balloon coming due in a few months, which payment is not included in the debt-to-income ratio. If the creditor has reason to believe that the balloon may not be refinanced a reasonably conclusion would be to not make the loan.
• If the loan is a simultaneous loan that is:
o A higher-priced covered transaction then the balloon must be considered in the debt-to-income ratio;
o Not a higher-priced covered transaction, but has term of 61 months or longer, then the regular monthly payment amount is used in the debt-to-income ratio; or
o Not a higher-priced covered transaction, but has term of less than 61 months, then the balloon payment amount is used in the debt-to-income ratio.
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