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B3-6-04, Qualifying Payment Requirements (02/07/2024)

Introduction
This topic contains information on determining the borrower’s monthly PITIA used for qualifying purposes, including:

Qualifying Payment Amount

The calculation of the qualifying payment amount for the subject property will differ based on the transaction type (as shown in the following table). For all loans, the qualifying rate is based on the original loan amount and the loan amortization term.

These policies apply to both manually underwritten loans and DU loan casefiles. In all cases, qualification must consider the borrower's current obligations and other mortgage-related obligations, e.g. PITIA.

Loans subject to temporary interest rate buydowns must be qualified without consideration of the bought-down rate, based on the transaction type below.

Qualifying Interest Rate Requirements
Transaction Type DU and Manual Underwriting
Fixed-rate mortgages Note rate
ARMs with initial fixed-rate period of three years or less The maximum interest rate that could apply during the first five years after the first payment is due.
ARMs with initial fixed-rate period of five years

Greater of

  • the maximum rate that could apply during the first five years after the first payment date (note rate plus first rate change cap), or
  • the fully indexed rate
ARMs with an initial fixed-rate period of greater than five years
  • No less than note rate

Exception: Greater of the note rate or the fully indexed rate for loans that are higher-priced mortgage loans or higher-priced covered transactions under Regulation Z. If the fully indexed rate is higher, the loan must be manually underwritten.

Additional Information About ARM Qualifying for DU Loan Casefiles

For DU loan casefiles, the fully indexed rate is defined as the index plus the margin as entered in the online loan application. The index and margin are required for all ARM loans submitted to DU.

The following table describes how DU applies the qualifying interest rate requirements based on the DU ARM Plan that is submitted in the online loan application.

ARM Type (Initial Adjustment Period) DU ARM Plan

Standard Index Type 

 DU Qualifying Rate
1-Year ARMs (12 months) FM GENERIC, 1 YR, 1% ANNUAL Cap

NA

 Note rate plus 5%
1-Year ARMs (12 months)

FM GENERIC, 1 YR, 2% ANNUAL Cap 

 NA Note rate plus 6%
3-Year ARMs (36 months) FM GENERIC, 3 YR 3 year SOFR (2/1/5) Note rate plus 5%
5-Year ARMs (60 months) FM GENERIC, 5 YR 5 year SOFR (2/1/5) Greater of fully indexed rate or note rate plus 2%
7 and 10-Year ARMs (84 and 120 months respectively)

FM GENERIC, 7 YR

FM GENERIC, 10 YR

7 year SOFR (5/1/5)

10 year SOFR (5/1/5)

Note rate
Any Submission of an ARM plan number that is not recognized by DU (referred to as "Lender ARM Plan") NA
  • Qualifying rate entered in the ARM Qualifying Rate field in DU
  • For ARMs with an initial fixed rate period greater than five years, if the lender wants to use an interest rate higher than the note rate to qualify the
    borrower, the higher rate must be entered in the ARM Qualifying Rate field in DU and the Lender ARM Plan must be used. 
  • If the ARM Qualifying Rate field is not entered, DU will use the note rate plus 5%

 

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2024-01 February 07, 2024
Announcement SEL-2023-05 June 07, 2023
Announcement SEL-2022-03 April 06, 2022
Announcement SEL-2021-08 September 01, 2021

 

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