Qualified Mortgage (QM) Loans
QM loans are those loans that meet both borrower and lender criteria of the Frank/Dodd regulation and the ATR (Ability-to-Repay) rule.
With ATR, lenders must ensure that borrowers will be able to make the new loan payments. To do so, they determine that the borrower meets 8 criteria:
- current or reasonably expected assets or income
- current employment status
- expected monthly payment on the mortgage
- monthly payments on any other mortgages, if there are any
- all monthly payment for mortgage-related obligations (property taxes, mortgage insurance, HOA fees, property insurance)
- current debt obligations (credit cards, car payments, alimony and child support, if any, student loans
- monthly Debt-to-Income (DTI) ratio and residual income available (there must be enough to to cover things such as food, clothing, entertainment, etc.)
- credit history
Lenders who do not comply with ATR risk incurring high costs: 3 years of the interest on the loan, all the fees the borrower paid to the lender, and borrower’s legal fees. To actually incur those costs, a borrower must prove in court that the lender failed to comply with ATR.
Besides ATR, what makes a loan a qualified mortgage is the absence of ‘risky’ features. Qualified mortgages do not allow
- an interest-only period
- negative amortization (payments lower than full principal and interest)
- balloon payments
- terms longer than 30 years
- less than full documentation
- points and fees that are over 3% of the loan amount (except for loans under $100,000, but even with those, there are limits to what they can be). Borrower debt-to-income (DTI) ratios greater than 43% (This one did not apply right away. Loans that can be sold to Fannie Mae or Freddie Mac can exceed 43% till 01/10/2021 or till Fannie Mae and Freddie Mac exit federal conservatorship, whichever comes first). (At first, for about 2 years, the DTI could be 45%, then it went up to 50% in come cases, i.e., really good borrowers).
What do qualified mortgages mean for borrowers?
It means they are given loans they are able to repay, so less likely to end up in foreclosure.
For the lender, meeting ATR and QM standards offers some specific legal protection; QM loans that meet certain pricing limits provide lenders with a “safe harbor” (called a “conclusive presumption”) provision that limits a borrower’s ability to sue on grounds that the lender didn’t properly measure his or her ability to repay the loan. Non-QM loans and even certain “high cost” QM loans don’t afford this protection to the lender, where a “rebuttable presumption” standard is used, giving borrowers somewhat stronger legal rights that the lender didn’t properly employ ATR standards before making the mortgage loan.
What do qualified mortgages mean for lenders?
It provides them legal protection and fewer foreclosures in the future. Legal protection in the sense that, if they prove they followed the rules above (ATR and QM), they are not legally liable when borrowers sue them over their loans.