Lenders should consider borrowing a guideline from the Department of Veterans Affairs to underwrite mortgages that do not meet the safe harbor test of the qualified mortgage rule, according to a new study by the Urban Institute.

The authors recommend using the VA residual income test, which consider how much a borrower has left to cover living expenses after paying major bills, including the mortgage. This would give lenders greater confidence that a borrower can repay the loan—and a way to rebut claims by defaulting borrowers that the lender didn't verify ability to repay. (Loans that do not meet QM standards have weaker protections against such lawsuits.)

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