The federal government has implemented the new Qualified Mortgage (QM) rules. The implementation of these rules poses many challenges for lenders as they now have to tighten their underwriting norms. On the other hand, borrowers may hardly notice any difference. However, borrowers at the lower and the higher ends of the spectrum may find it difficult to get a qualified mortgage.
What is a qualified mortgage?
The new mortgage rules clearly state that the lender has to verify the borrower’s ability to repay before making a closed-end loan to them. In addition, the fees and points charged by the lender cannot be more than 3% of the mortgage amount. However, if the loan amount is less than $100k, the lender may charge a higher fee. The term of the loan cannot exceed 30 years.
If the lender fails to verify the borrower’s eligibility, the loan will not be considered as a qualified mortgage. Qualified mortgages do not carry the risk of negative amortization.
Features of qualified mortgages
According to the new rules, any mortgage made to a borrower whose debt-to-income (DTI) ratio is 43% or less will be considered as a qualified mortgage.
Loans that are eligible for guarantee, insurance, or purchase by FHA, GSE, USDA, or VA are qualified mortgages regardless of the DTI ratio of the borrower.
Loans that small creditors make and keep in their portfolio are qualified mortgages, provided that the lender has less than $2 billion in assets and originates less than 500 first mortgages in a year. Here again, the lender has to verify the borrower’s DTI ratio. However, no DTI limits are specified.
If a lender makes a loan without verifying the borrower’s income and expenses, they will not get protection if any legal disputes arise in the future.
How qualified mortgages protect the interests of the borrower and the lender
Qualified mortgages are less likely to end up in a default because these loans are made only after verifying the borrower’s ability to repay. If the lender meets the QM guidelines and underwriting requirements, they will receive protection against legal challenges. A qualified mortgage needs to be fully amortizing. That means the monthly mortgage payment should reduce the loan principal amount.
Even if the DTI ratio is higher than 43%, the loan can still be considered a qualified mortgage provided that it is eligible for purchase by Freddie Mac or Fannie Mae. No-doc and interest-only loans are not considered as qualified mortgages.
Right now the definition of the qualified mortgage is broad enough to accommodate 95% of the loans that are being made. Therefore, borrowers who are getting a mortgage in 2014 are unlikely to notice much difference. That said; credit unions which have slightly more relaxed underwriting norms are wary of these rules.
The new rules may also make it difficult to get jumbo loans. Since the value of these loans exceeds Freddie and Fannie loan limits, they are not considered as qualified mortgages if the borrower’s DTI ratio also exceeds 43%.
Lower income borrowers will probably have to pay fees and points that exceed the specified 3% limit. This might encourage them to get an unqualified loan which is more expensive.
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