Qualification rate

Definition

The rate a lender uses to check that you could still pay if rates rose. At the time of writing, it is the higher of your contract rate plus two points and a 5.25% floor. The qualifying payment is therefore higher than the one you will actually make, and it is the one that goes into the debt-service ratios. Example: on a $400,000 loan amortized over 25 years, a 4.5% contract rate gives a payment of about $2,210 a month, but the lender tests at 6.5%, about $2,680. The difference cuts the eligible amount by roughly $60,000 for the same income. The test applies to insured and conventional loans at federally regulated lenders; some alternative lenders apply their own rules.