Ability to Repay Your Mortgage
April 14, 2017
Do you have the ability to repay a mortgage? Naturally, any lender is going to ask that question and check to see if you qualify for a mortgage. New mortgage regulations including the Qualified Mortgage Rule and the Ability to Repay Rule make it tougher for lenders to give out loans.
Learn about the types of loans that are being offered (or excluded) and how to make sure that you pass the Ability to Repay rule.
Ability to Repay Rule – Less Choices
The Qualified Mortgage Rule (QMR) will go into effect starting January 10th, 2014. Fannie Mae and Freddie Mac are already getting prepared for the changes and are keeping lenders informed. One of the main aspects of the QMR is the Ability to Repay Rule (ATR), which requires the lender to verify that you, the borrower can make the required payments.
As part of the QMR these types of loans will not be offered through Fannie Mae and Freddie Mac:
Loans with interest-only, balloon payments or negative amortization payment schedules.
- Have terms exceeding 30 years.
- Have total points and fees that exceed 3% of the total loan amount.
Ability To Repay rule – Reasons for Qualified Mortgages
Making sure that you can repay a loan sounds like a good idea for everybody. The lender wants to make sure that you can repay the loan and you definitely don’t want to default on a loan. So why do we need the ATR rule?
Here are some of the basic reasons:
- Keep out predatory lending: If you can’t qualify for a conventional loan or a loan through a government backed program (such as FHA, VA, or USDA), then you should be extra careful about any mortgage proposal that comes your way
- Keep the Costs Down: Predatory lenders usually offer loans at high costs. For most loans, a cap is set at 3% to be a Qualified Mortgage.
- Keep the Terms Reasonable: By limiting the terms of the loan to a fully amortizing loan, lenders can only qualify you based on terms that you can afford. While interest-only and negative amortization loans might be right for a few select borrowers, they are not terms for the average borrower. Taking a mortgage should fit into your long-term financial plan of buying and owning a home.
Make Sure that You Can Repay Your Mortgage
Here are the steps you need to take to show the lender that you have the ability to repay the mortgage.
- Show proof of steady income, including your W2 (for employed) and tax returns, bank statements, and other documents regarding your financial status.
- Show a satisfactory credit history, including a clean credit report and good-excellent Credit Score. Lender’s will pull your credit report and a FICO Credit Score (unique to lenders). In order to qualify for a mortgage you will need a FICO score over 620.
- Keep your Debt to Income ratio (DTI) down. Make sure that you have sufficient funds to cover your monthly housing and debt expenses. This includes your mortgage payments, property tax, homeowner insurance as well as your monthly debt payments. A recommended debt to income ratio (DTI) is about 36% and 20-25% for your household expenses.
- Down-payment of 20% or more will save you paying mortgage insurance for conventional loans. However, you can qualify for a conventional loan or a FHA loan with a down-payment as little as 3-3.5%.