Which mortgage type is considered safer for lenders, ensuring compliance with ability-to-repay standards?

The type of mortgage that is considered safer for lenders, specifically because it ensures compliance with ability-to-repay standards, is a qualified mortgage. Qualified mortgages, or QMs, are designed to meet specific criteria set forth by regulatory agencies, aimed at protecting both borrowers and lenders.

These mortgages typically require that the borrower has a reliable income, their debt-to-income ratio does not exceed a specified limit, and they do not have high-risk features such as negative amortization or interest-only payments. By adhering to these standards, qualified mortgages help ensure that borrowers are capable of repaying their loans, thereby reducing the risk of default for lenders.

In contrast, subprime mortgages are aimed at borrowers with lower credit scores and may present higher risks for lenders due to the potential for default. Conventional mortgages can vary in risk based on various factors, while balloon mortgages, which often feature large final payments that can cause financial strain, may not comply with the stricter ability-to-repay requirements. Hence, a qualified mortgage represents the safest option for lenders in terms of ensuring borrowers can repay their loans.