Real estate investors know full well that as mortgage rates go up, the potential pool of buyers draws down. That makes sense because higher rates mean higher mortgage payments and when selling a newly constructed home the buyer must qualify for financing or pay cash. Depending upon theknow what ability to repay means source, anywhere from one-quarter to one-third pay cash for their properties and don’t need financing.

For the rest, a loan approval is partly based upon a borrower’s ability to repay the mortgage, evidenced by comparing current monthly obligations with gross monthly income.

Today, banks and mortgage companies alike are charged with making sure the applicants can in fact afford the new mortgage payment along with any current existing credit payments. Today, there is even a debt to income ratio used to establish affordability. In the past, lenders could issue an approval as long as the loan made it through an approved automated underwriting system. Debt to income ratios could be as high as 50 percent, or even more, typically issued to borrowers with additional positive compensating factors such as a stellar credit score, more down payment or a combination of both.

“The CFPB mandated earlier this year that the maximum debt-to-income ratio for both conventional and government-backed residential loans be no greater than 43 percent of monthly income. This applies now to both owner occupied and investment properties,” said Shaun Cohen, of EquityBuild Finance. “Real estate investors who plan on flipping their new construction just need to be aware of the change.”

The so-called “ability to repay” ratio must be followed in order for the loan to receive a “safe harbor” guideline that protects lenders from lawsuits. As long as the lender followed proper approval guidelines across the board and the ability to repay ratio is followed, the loan will be both salable in the secondary markets as well as receive the special protection.