By September 21, 2010 0 Comments Read More →

What’s A Qualified Mortgage (QM)?

One of the better ideas to come out of the Wall Street Reform Act was to create something called a “qualified residential mortgage.” You want to know about such financing because most lenders will offer nothing else — and that’s good news for borrowers.

Under Wall Street reform several federal agencies are supposed to work out a final definition of the term “qualified residential mortgage” or QRM. However, we largely know how such loans will be defined because of the requirements of legislation.

Qualified Mortgage Standards

In basic terms, a qualified residential mortgage looks like this:

  1. The loan application must be fully documented. Income and employment claims must be verified. (Kiss goodbye to “no doc” and “lo 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 qualified 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. Allows prepayment penalties for qualified loans — but not for loans which are not qualified. The maximum prepayment penalty will be 2 percent the first year, 2 percent the second year and 1 percent the third year.
  10. Bans lenders from requiring single-premium credit life and similar products.
  11. Bans lender requirements for mandatory arbitration
  12. Requires substantially-equal monthly payments with no balloon payment at the end of the loan term.

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 when the final definitions are unveiled.

What’s clear, however, is that lenders who offer mortgages outside the guidelines will face significant liability, so much so that you can already see changes in the financing marketplace. If you don’t believe it just try and find an option ARM….

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