What is the ability-to-repay rule?
“The ability-to-repay rule is the reasonable and good faith determination most mortgage lenders are required to make that you are able to pay back the loan,” states Consumer Finance Protection Bureau. The rule is important because it helps determine if you can afford to pay back a loan. Mortgages are expensive. Because of that, your finances are heavily scrutinized to determine exactly what your buying power is. The bureau continues, “Under the rule, lenders must generally find out, consider, and document a borrower’s income, assets, employment, credit history and monthly expenses. Lenders cannot just use an introductory or “teaser” rate to figure out if a borrower can repay a loan.”
How do I qualify for a loan under this rule?
There are a ton of things that can make sure you qualify for the best possible loan with the best possible interest rates.
- Credit Score – Generally you want a score in the high 600’s before applying for a mortgage. This will give you the most options with some of the better financing and interest payments.
- Make a Budget – Make sure you budget for the new expenses associated with owning a home. This is the biggest issue new homeowners run into. They simply don’t budget these new expenses and are caught off guard by the cost of repair.
- Determine your Down Payment – When you are shopping for interest rates you need to determine if you can afford a down payment and what if any kind of down payment can you afford. You’ll need this information so that the creditor can determine if you can repay your loan.
- Decide how much you want to spend – Now that you have a better idea of what the cost of a mortgage is you can better understand what you can afford. Determine what you want to spend and then ask for that loan amount, minus your down payment.
That’s really the majority of the information that the creditor should need. There may be some more information required about your financial stability and credit card statements. However, this is the bulk of the information that they should need. In the end, it’s about what you can and cannot afford. With the ability-to-repay rule, a bank should not give you a loan they know you cannot repay. That is the purpose of this rule. Make sure that your finances are stable before you even consider shopping around for a loan and interest rates. Also, remember to never shop around for homes until you know what you can afford. It can be absolutely devastating to fall in love with a home you can’t afford but you still turn around and purchase it.