What’s A Qualified Mortgage (QM)?

One of the better ideas to come out of the Dodd-Frank Wall Street Reform and Consumer Protection Act was to create something called a “qualified residential mortgage.” You want to know about such financing because most lenders offer little else.

Under Wall Street reform several federal agencies have worked out a definition of the term “qualified mortgage” or QM

Qualified Mortgage Standards

In basic terms, a qualified mortgage looks like this:

1. The loan application must be documented under the Ability-to-Repay rule. Income and employment claims must be verified. (Kiss goodbye to “no doc” and “low doc” loan applications.)
2. For fixed rate mortgages, the borrower must be qualified on the basis of monthly costs for mortgage interest, mortgage principal, property taxes, property insurance and related assessments (think of condo fees, mortgage insurance, etc.)
3. For adjustable-rate mortgages, the borrower must be qualified at the highest rate possible during the first five years of the loan term.
4. If the lenders knows or thinks that the property will be financed with a second loan, the lender must qualify the borrower on the basis of the combined loan costs. In other words, simultaneous second and piggy-back loans are fine as long as the borrower qualifies for the total debt.
5. The loan term cannot be more than 30 years.
6. The debt-to-income ratio cannot generally exceed 43 percent.
7. Points and fees are limited to 3 percent of the initial loan amount when more than $100,000 is being financed. Higher percentages are allowed for smaller loans, reverse mortgages and home equity lines of credit.
8. To establish an interest rate most lenders will not charge more than 1.5 percent above the Average Prime Offer Rate.
9. You can have a QM with prepayment penalties but not for loans which are not qualified (non-QMs). The maximum prepayment penalty will be 2 percent the first year, 2 percent the second year and 1 percent the third year.
10. The law bans lenders from requiring single-premium credit life and similar products.
11. Dodd-Frank bans lender requirements for mandatory arbitration
12. The law requires substantially-equal monthly payments with no balloon payment at the end of the loan term. In other words, you cannot have an interest-only QM mortgage.

So, generally, a qualified residential mortgage is a conventional, FHA or VA loan that requires three or fewer points for fees and points at closing and is underwritten with a full-docs loan application.

I say “generally” because there are some exceptions to the rules and likely there will be more as the rules and regulations evolve.

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