Short answer: before a lender makes a mortgage, federal law requires a “reasonable and good faith determination” that you have a reasonable ability to repay the loan according to its terms, based on verified information about your income or assets, debts and the full monthly payment. A qualified mortgage is a loan with limits on risky features, points and fees and price; for those loans the lender gets a legal presumption that it followed the rule. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.
Where the rule comes from
The Truth in Lending Act says no creditor may make a residential mortgage loan without a reasonable and good faith determination, “based on verified and documented information”, that the consumer can repay the loan and the taxes, insurance and assessments that go with it (15 U.S.C. 1639c(a)(1), Cornell LII, read October 30, 2026). Regulation Z carries this out in 12 CFR 1026.43 (eCFR, text up to date as of October 28, 2026, read October 30, 2026).
Which loans it covers
The rule covers consumer credit secured by a dwelling, including land attached to it (1026.43(a), (b)(1)). It does not cover a home equity line of credit or a loan secured by a timeshare (1026.43(a)(1)-(2)). The repayment and qualified mortgage parts, paragraphs (c) through (f), also do not apply to (1026.43(a)(3)):
- A reverse mortgage;
- A temporary or bridge loan with a term of 12 months or less, such as one for buying a new home before you sell the current one;
- The construction phase, of 12 months or less, of a construction-to-permanent loan;
- Loans under some housing finance agency programs and from some community and nonprofit lenders listed in 1026.43(a)(3)(iv) through (vi).
The CFPB says a few special types of lenders and programs are exempt, and suggests a complaint if you have a problem with your mortgage (CFPB, last reviewed April 3, 2024; this page may be out of date).
The eight things a lender must consider
Under 1026.43(c)(2), the lender must consider:
| Factor | Section |
|---|---|
| Your current or reasonably expected income or assets, not counting the value of the home that secures the loan | 1026.43(c)(2)(i) |
| Your current employment status, if the lender relies on job income | 1026.43(c)(2)(ii) |
| Your monthly payment on this loan | 1026.43(c)(2)(iii) |
| Your monthly payment on any other loan on the same home that the lender knows or has reason to know will be made | 1026.43(c)(2)(iv) |
| Mortgage-related costs: property taxes, required insurance, association fees, ground rent and leasehold payments | 1026.43(c)(2)(v), (b)(8) |
| Your current debts, alimony and child support | 1026.43(c)(2)(vi) |
| Your monthly debt-to-income ratio or residual income | 1026.43(c)(2)(vii) |
| Your credit history | 1026.43(c)(2)(viii) |
How the information is verified
The lender must verify what it relies on with reasonably reliable third-party records (1026.43(c)(3)). For income or assets, the rule lists examples such as an IRS tax-return transcript, copies of filed tax returns, W-2 forms, payroll statements, financial institution records, records from your employer, and records from a government agency showing benefit income (1026.43(c)(4)). Employment may be checked by phone if the lender keeps a record of it (1026.43(c)(3)(ii)). If you list a debt on your application that is not on your credit report, the lender does not have to verify it separately (1026.43(c)(3)(iii)). For more on income papers, see how lenders verify income.
The payment the lender must use
The lender may not base its decision on a low starting rate alone. It must use the fully indexed rate or any introductory rate, whichever is greater, with monthly fully amortizing payments that are substantially equal (1026.43(c)(5)(i)). Special rules apply to balloon, interest-only and negative amortization loans (1026.43(c)(5)(ii)). The CFPB puts it this way: if a low rate goes up in later years, the lender has to make a reasonable effort to figure out if you can pay the higher rate too (CFPB, last reviewed April 3, 2024; this page may be out of date).
This example is only for the math, with example figures, not an offer or a rate for any loan. It uses a $250,000 adjustable-rate loan over 30 years with an introductory rate of 5.5% and a fully indexed rate of 7.0%, monthly income of $6,000, mortgage-related costs of $450 and other debt payments of $600.
| Item | At the 5.5% starting rate | At the 7.0% fully indexed rate |
|---|---|---|
| Principal and interest | $1,419.47 | $1,663.26 |
| Total monthly debts: payment + $450 + $600 | $2,469.47 | $2,713.26 |
| Debt-to-income ratio: total debts / $6,000 | 41.2% | 45.2% |
Under the rule the lender must use the higher figure, $1,663.26, so the debt-to-income ratio it considers is 45.2%, and the residual income is $6,000 - $2,713.26 = $3,286.74 (1026.43(c)(7)). The rule does not set one required ratio; for the ratio itself, see debt-to-income ratio.
What a qualified mortgage is
Under the general definition in 1026.43(e)(2), a qualified mortgage:
- Has regular, substantially equal payments that do not raise the principal, let you put off paying principal, or end in a balloon payment (except for loans under 1026.43(f));
- Has a term of no more than 30 years;
- Stays within the points and fees limits below;
- Is underwritten with the highest rate that may apply in the first five years after the first payment is due, including mortgage-related costs;
- Comes from a lender that considers and verifies your income or assets, debts, alimony, child support, and debt-to-income ratio or residual income;
- Has an APR within set amounts of the average prime offer rate for a comparable loan.
The rule has other qualified mortgage types too, for example for small creditors and for seasoned loans (1026.43(e)(4) through (7) and (f)). The CFPB says loans backed by HUD/FHA, USDA and VA are qualified loans, and that other loans must meet the special requirements (CFPB, last reviewed January 2, 2025; this page may be out of date).
The 2026 points and fees limits
A loan is not a qualified mortgage if its total points and fees, as defined in 1026.32(b)(1), are above these limits for 2026, which reflect a 2.3 percent CPI-U increase (1026.43(e)(3)(i), Supplement I, comment 43(e)(3)(ii)-1.xii, eCFR; Federal Register, December 15, 2025):
| Loan amount | Points and fees may not exceed |
|---|---|
| $137,958 or more | 3% of the total loan amount |
| $82,775 to under $137,958 | $4,139 |
| $27,592 to under $82,775 | 5% of the total loan amount |
| $17,245 to under $27,592 | $1,380 |
| Under $17,245 | 8% of the total loan amount |
Examples only for the math, with example loan amounts: $300,000 loan: $9,000 (3% of the loan amount); $100,000 loan: $4,139 (a flat dollar limit); $50,000 loan: $2,500 (5% of the loan amount); $15,000 loan: $1,200 (8% of the loan amount). The CFPB notes that not every charge counts toward this limit, for example FHA insurance premiums (CFPB). The dollar amounts are adjusted each January 1 by the CPI-U (1026.43(e)(3)(ii)).
The 2026 price test
For a general qualified mortgage, the APR may not be above the average prime offer rate (APOR) for a comparable loan, as of the date the rate is set, by these amounts or more in 2026 (1026.43(e)(2)(vi), comment 43(e)(2)(vi)-1.v):
| Loan | Fails if the APR is over APOR by |
|---|---|
| First lien, $137,958 or more | 2.25 or more percentage points |
| First lien, $82,775 to under $137,958 | 3.5 or more percentage points |
| First lien, under $82,775 | 6.5 or more percentage points |
| First lien on a manufactured home, under $137,958 | 6.5 or more percentage points |
| Subordinate lien, $82,775 or more | 3.5 or more percentage points |
| Subordinate lien, under $82,775 | 6.5 or more percentage points |
For a rate that may change in the first five years, the lender uses the highest rate in that period for this test (1026.43(e)(2)(vi)). An example only for the math, with example rates: on a first-lien $300,000 loan with an example APOR of 6.00% and an APR of 7.90%, the gap is 7.90% - 6.00% = 1.90 percentage points. That is under 2.25, so it passes the price test. Because the gap is 1.5 or more, it is a higher-priced covered transaction (1026.43(b)(4)), so the lender gets a presumption of compliance rather than a safe harbor.
Safe harbor and presumption
For a qualified mortgage that is not higher-priced, the lender complies with the repayment rule (a safe harbor, 1026.43(e)(1)(i)). For a higher-priced one, the lender is only presumed to comply; that presumption can be rebutted by showing that, at closing, your income, debts and payments would leave you with too little residual income or assets to meet living expenses (1026.43(e)(1)(ii)). The statute says a lender may presume a qualified mortgage meets the rule (15 U.S.C. 1639c(b)(1)). If you think a lender did not check your ability to repay, ask a lawyer about your own case; you can look for legal aid through the Legal Services Corporation.
Prepayment penalties
A covered loan may have a prepayment penalty only if other law allows it and the loan has an APR that cannot go up, is a qualified mortgage and is not a higher-priced mortgage loan. Even then the penalty may not apply after three years and may not be more than 2 percent of the amount prepaid in the first two years or 1 percent in the third year, and the lender must also offer a loan without a penalty (1026.43(g)(1)-(3)).
Related protections
Loans with a much higher APR or points and fees may also be high-cost loans with extra protections; see high-cost home loan protections. For a loan on a manufactured home, see manufactured home financing rules. To complain about a lender, use consumerfinance.gov/complaint.
Questions to ask the lender
- Is this loan a qualified mortgage, and under which definition?
- What rate and payment did you use to check whether I can repay?
- What debt-to-income ratio or residual income did you use?
- What are the total points and fees on this loan, and how close are they to the limit?
- Is the loan higher-priced, and is there a prepayment penalty?
Checklist
- The lender must consider and verify income or assets, debts and the full payment (1026.43(c)).
- The payment is based on the higher of the starting rate or the fully indexed rate.
- A qualified mortgage has no negative amortization, interest-only or balloon features in the general definition, and a term of 30 years or less.
- Check the 2026 points and fees limits for your loan amount.
- Prepayment penalties are limited to three years and 2 or 1 percent.
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Sources
- eCFR: 12 CFR 1026.43, Minimum standards for transactions secured by a dwelling (Regulation Z), current text up to date as of October 28, 2026
- Cornell LII: 15 U.S. Code 1639c, Minimum standards for residential mortgage loans (Truth in Lending Act)
- eCFR: Supplement I to Part 1026, Official Interpretations (Regulation Z), current text up to date as of October 28, 2026
- Federal Register (GovInfo): Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages), final rule, December 15, 2025, effective January 1, 2026 (FR Doc. 2025-22773)
- CFPB: What is the ability-to-repay rule? (last reviewed April 3, 2024)
- CFPB: What is a Qualified Mortgage? (last reviewed January 2, 2025)
- CFPB: My mortgage lender told me it was exempt from the ability-to-repay mortgage rule. Is this true? (last reviewed April 3, 2024)
- CFPB: Submit a complaint
- Legal Services Corporation: Find legal aid
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.