Question:

A member wants to build a new home while continuing to live in—and eventually sell—their current residence. When we underwrite construction loans, we always assess the long-term takeout (permanent financing) as part of the approval process. Are there circumstances where we can exclude the member’s current mortgage from the debt ratio calculation, or must they sell their home before starting the construction?

Answer:

Under Regulation Z, certain construction loans are exempt from the Ability-to-Repay (ATR) requirements, which may offer some flexibility. Specifically, temporary or short-term loans with terms of 12 months or less, or the initial construction phase (12 months or less) of a construction-to-permanent loan, are not subject to ATR rules.

If the loan qualifies as exempt, you are not required to evaluate the member’s ability to repay under the standard ATR framework—meaning the current mortgage payment may be excluded when calculating qualifying debt ratios.

The official commentary to Regulation Z provides helpful clarification on this exemption and how it applies to construction lending.