How does a lender assess "affordability" under QM?

The assessment of "affordability" under Qualified Mortgages (QM) primarily hinges on a thorough evaluation of the borrower's income, debts, and expenses in relation to the loan terms. This comprehensive approach ensures that lenders consider the borrower's overall financial picture, which helps in determining whether the borrower can consistently make their mortgage payments without straining their financial resources.

Considering the borrower’s income allows the lender to understand their capacity to service debt, while reviewing debts and expenses ensures that all monthly obligations are taken into account. This holistic evaluation helps in establishing a debt-to-income ratio, which is a critical factor in the QM framework. By doing so, the lender can make informed decisions that align with responsible lending practices, ultimately protecting both the lender and the borrower from potential financial distress.

In contrast, simply examining a borrower's credit score does not provide a complete view of their financial situation. Estimating future income potential may introduce uncertainty, and calculating the loan interest rate focuses solely on costs rather than the borrower's ability to manage those costs in relation to their overall financial stability.