Copyright: Brian A Jackson / ShutterstockHow would you rate your ability to repay your mortgages? Most lenders will want to determine any potential borrower’s answer to the question, which can make them eligible (or not) to take out a loan. In fact, there are new regulations for lenders before they give out loans such as the Ability to Repay Rule and the Qualified Mortgage Rule.
Below are some details on the types of loans offered or excluded by lenders, as well as tips on how to go through the Ability to Repay Rule.
Beginning January 10, 2014, the Qualified Mortgage Rule or QMR took effect, which impacted potential borrowers. The Ability to Repay Rule (ATR) is among QMR’s key aspects, and lenders are expected to verify that borrowers can make mortgage payments.
There are some loan types that are not offered to all borrowers, based on the QMR. These include loans that come with interest-only, negative amortization payment and balloon payments. Other loans excluded are the ones that exceed 30 years, as well as potential borrowers whose total points and fees go beyond 3 percent of the overall loan amount.
Reasons for Establishing the ATR Rule for Qualified Mortgages
It is only fair for lenders that borrowers are able to repay the loaned amount. After all, this prevents people from defaulting on their loan. There are several other reasons why the ATR rule is important, such as the following:
Mainly, this rule is designed to avoid instances such as predatory lending. In case you are not qualified to take out a conventional loan or mortgages via the USDA, VA or FHA, among other government-backed programs, then you should watch out for mortgage proposals offered to you.
- Maintain reasonable terms.
Lenders are able to qualify borrowers depending on the loan term they can afford through a fully amortizing loan. Select borrowers that are qualified to take out a loan have terms to choose from including negative amortization and interest-only loans.
- Reduce costs.
Predatory lending comes with massive costs. On the other hand, there is a cap of 3 percent for most loans applicable to a Qualified Mortgage.
How to Prove Your Ability to Repay Your Mortgage
If you are thinking about taking out a loan, the following steps can help you in proving to your lender that you can make mortgage repayments.
– Present evidences of steady income such as bank statements, tax returns and W2 form for employed individuals.
– Minimize your Debt to Income ratio or DTI. There should be adequate funds to pay off your debt and housing expenses monthly. Generally, there should be a 36 percent DTI and 20 to 25 percent for household expenses.
– Make sure your credit history is satisfactory, along with a good to excellent credit score and a decent credit report.
– Keep your FICO score to higher than 620, since some lenders may check your FICO credit score to determine if you can qualify.
If you put in 20 percent down payment (or even more), you can get savings from mortgage insurance that comes with conventional loans. Yet, you may also be eligible for a FHA loan or a conventional loan with only a 3 to 3.5 percent down payment.
