Stress test

Definition

The everyday name for the rule requiring the lender to check your ability to pay at a rate higher than your contract rate: the qualifying rate, the higher of your rate plus two points and 5.25% at the time of writing. The test does not change your actual payment; it reduces the amount you can borrow. Example: with $100,000 of gross income and no debt, a 4.5% contract rate would allow borrowing about $520,000 over 25 years if the test did not exist; tested at 6.5%, the maximum falls to around $430,000. The test applies to insured loans and to conventional loans at banks and most federally regulated lenders. Credit unions and some alternative lenders can apply a different rule, which is why the same file can produce two different amounts.