What Does the New Qualified Mortgage Rule Mean To You

Qualified Mortgage (QM) rule, also called Ability To Repay (ATR) rule is part of implementing the Dodd-Frank act. QM rule implemented by Consumer Financial Protection Bureau (CFPB), is the first ever attempt at establishing a basic standard for qualifying borrowers for mortgage loans. The rule went into effect last month and has several provisions that could make borrowing more difficult for home owners and home buyers.

Qualified Mortgages cannot have the following loan features:

• An “interest-only” period, when you pay only the interest without paying down the principal
• “Negative amortization,” when the loan principal increases over time, even though you are making payments
• “Balloon payments,” which are larger-than-usual payments at the end of the loan term—though these are allowed in some limited circumstances
• Loan terms that are longer than 30 years

Qualified Mortgages limit how much of your income can go toward debt.

• Qualified Mortgages generally require that your monthly debt, including the mortgage, isn’t more than 43 percent of your monthly pre-tax income. In some circumstances, certain lenders may also decide that debt of more than 43% is appropriate.
• Temporarily, Qualified Mortgages can also be loans that can be bought by Fannie Mae or Freddie Mac or insured by certain government agencies, such as the Department of Agriculture, even if the debt ratio is higher than 43 percent. Additionally, loans that are insured or guaranteed by the Department of Housing and Urban Development, including through the Federal Housing Administration (FHA), are also qualified mortgages under rules issued by that agency.

Mortgages with high upfront points and fees are not Qualified Mortgages.

Qualified Mortgages don’t allow lenders to charge you excessive upfront points and fees. The cost limits depend on the size of the loan. Third-party charges, such as the cost of a credit report, are usually not included in the limit. Qualified Mortgages also have limits on discount points (a percentage of the loan that you pay up front in return for a reduced interest rate).

While the rules have been made to protect the borrowers and to prevent another mortgage meltdown, some of these policies restrict lending. Industry groups have protested some of these rules citing risks to the nascent real estate recovery.

After the crisis of 2008, the pendulum has swung too far on the other side restricting lending to even qualified borrowers. Let’s just hope the new Qualified Mortgage rule doesn’t worsen that.