What is the “STRESS TEST”?

The term “stress test” has generated a great deal of discussion in recent months. I have had numerous conversations with clients, family and friends who interpret it in different ways. One being, that the only way to qualify for a mortgage is to literally go to your doctor for a check-up.  Perhaps the doctor will determine that you are stressed, however this has nothing to do with your mortgage approval.  Based on many of my chats, I can understand how this may have been misunderstood. In fact, the real meaning of the “stress test” is to examine your financial ability to pay your mortgage should interest rates rise.  This means,  that a higher rate is used to determine affordability when applying for a mortgage.  It is called the qualifying rate and is typically 2% more than what you will actually pay. For example, if you have been approved for a mortgage with a 5 Year rate at 3.39%,  the qualifying rate is 5.39%. Your mortgage contract and your PAYMENTS will be based on the lower rate of 3.39%. The qualifying rate just means that you can AFFORD payments based on 5.39%,  which better positions you when it comes to re-negotiating your mortgage. As with all things in life, there are good and bad points to this rule. The good, is that you are more likely to afford your new mortgage payment in the event of a substantial interest rate increase as mentioned above. The bad, is that it reduces your overall borrowing power.   This means there could be a significant difference in your pre-approval amount when looking to buy a home. As of March 2018, there are still some lenders that are not following the “stress test” rules as they are not federally regulated and are not required to do so.  It is however, believed that they will likely follow suit.

The “stress test” rules have been in effect for well over a year,  however,  prior to January 2018 it was only those clients who had less than 20% down that were affected. As of January of 2018 the “stress test” is for ALL borrowers regardless of the down payment or equity they have accumulated.  Although the rules make lending a little trickier,  there are many options available that offer borrowers the solutions they are looking for.