Federal regulations for mortgage loans require lenders to assess a home-buyer’s likelihood of paying back the loan over the years ahead. As a result, lenders are required to ask about a borrower’s current financial situation and financial history. Lender questions will cover employment, expenses, assets, income and of course credit history and credit rating. The key thing for the prospective home-buyer to understand is that lenders have to ask these questions and make this assessment. These ability-to-repay rules are built into loans that meet Qualified Mortgage guidelines. If you are shopping and comparing loans, keep track of which options are meet the guidelines to be Qualified.

Picture your home loan on one side of a see-saw, and the home itself on the other. Thats a simplified version of LTV — "Loan to Value". Its one of the key ratios involved in setting loan amounts. Lenders frequently set LTV limits. If you know the ratio, you know the upper boundary of loan size, like this: "LTV on this $500K home is 80%." 80% x $500K = $400K max loan. Buyer would need at least $100K down for that loan. LTV also measures equity. If you put $100K down for the example above, you have $100K equity in the home. As a result, higher-LTV loans may require mortgage insurance. With an LTV greater than 80%, the risk of default is high because the homeowner has a lower "stake" in paying off the mortgage.

Laws to provide stable, suitable home financing created a category of loans and lending practices called "Qualified Mortgages." They provide guidance to help lenders provide loans that borrowers can repay successfully. Following the guidance and practices — and assessing each borrowers ability to repay—gives lenders additional legal protection. The Qualified Mortgage guidelines provide predictable and more-easily-understood loan features. They also rule out some loan terms and practices. Qualified mortgages cannot be: Interest-only loans Loans with terms >30 years "Negative Amortization" loans (increasing principal over time) Most forms of "balloon" loans with large payment partway into the loan period. These consistent practices help lenders and regulators provide consumers with objective guidance about reasonable debt. If you are buying a home, ask about your Qualified Mortgage options.