For those in or around the mortgage business that have heard the term “Qualified Mortgage” or QM, but do not know what it really is, this should help explain things. A qualified mortgage is a home loan that is typically attached to a primary residence and is for consumer purposes. This means if you are buying to occupy or refinancing to pay personal debts or lower the rate, you are obtaining a QM.
Per the Real Estate CFPB:
A Qualified Mortgage is a loan a borrower should be able to repay. Beginning on January 10, 2014, lenders making virtually any residential mortgage loan will have to assess a borrower’s ability to repay the loan. A Qualified Mortgage is presumed to meet this requirement. A Qualified Mortgage is a loan that avoids risky features and meets other requirements. In general, the borrower also must have a total monthly debt-to-income ratio including mortgage payments of 43% or less.
The qualified mortgage falls under the recent Dodd-Frank rules protecting homeowners from acts such as predatory lending. There are certain guidelines that lenders must now follow to stay within new industry standards to protect consumers. Certain harmful loan features that were permitted in the past and caused much of the bank crisis will no longer be, including:
- An “interest only” only period, when you pay on the interest without paying down the principal, which is the amount of money you borrowed.
- “Negative Amortization”, which can allow your loan principal to increase over time, even though you are making payments.
- “Balloon Payments” which are larger than usual payments at the end of the term of a loan.
- Loan Terms longer than 30 years
Another major part of the QM is for the creditor to determine the borrowers’ “ability-to-repay” the home loan. There are eight major factors to consider when approving a QM loan:
- Current or reasonably expected income and assets
- Current employment status
- The monthly payment on the covered transaction
- The monthly payment on any other simultaneous loans
- The monthly payment for mortgage related obligations
- Current debt obligations
- Monthly debt-to-income ratio
- Credit History
These implementation of the QM and its guidelines is a way to protect the homeowner from the disaster that occurred in the mid 2000’s.
For those who cannot obtain a QM loan, there is something called the “Non-Qualified Mortgages”. These loans fall outside of the tighter covered loan rules and allow for higher risks and rates. These are the loans at Cushner Capital we specialize in. More on the Non QM loans in my next blog!