There has been a lot of press in 2018 about the new mortgage Stress Test. In short, it is a change in the qualification process. It is designed to protect people from borrowing more than they can afford as interest rates begin to rise.
When the Stress Test was introduced, the maximum mortgage you could get was reduced by approximately 20%. To find out how much mortgage you qualify for under these new rules, contact your mortgage professional. Then work with your Realtor to move forward with your home ownership dreams.
Want More Detail & Understanding?
To understand what the mortgage Stress Test is and how it affects you, we need to look first at how mortgage decisions are made.
Mortgage decisions are made in two steps:
- Step One is a review of your credit report. If the lender likes what they see, they go to Step Two.
- Step Two is a comparison of debt and mortgage payment(s) to your gross income. The total of all payments must be less than 42-44% of your gross income. This step determines how much you will qualify for
Before the Stress Test was introduced, the Step Two calculation used the actual mortgage payment based on the actual mortgage rate.
Now, the Step Two calculation uses a mortgage payment based on the higher Stress Test interest rate. The actual Stress Test rate is the government prescribed rate (currently 5.14%) if you have less than 20% down payment. If you have 20% or more down payment, it is the greater of the prescribed rate or the actual mortgage rate plus 2%.
NOTE: The Stress Test has no effect on your actual payment. It is only a change in the qualification formula that reduces your maximum mortgage amount.
For example – if you have a $300,000 mortgage with a 25 year amortization and your actual mortgage rate is 3.5%, your payments are $1498 monthly. But, the payment used in that qualifying ratio step 2 above is $1769 or $1831 monthly, depending on how much down payment you have.
Still really confused? Just contact us. We’ll either help you arrive at an understanding – or – we’ll just let you know how much you can qualify for under current mortgage lending rules. Your choice!