Quick Guide To Qualified Mortgage Rules For Lenders

What is a Qualified Mortgage? And precisely what makes a mortgage "Qualified"? A product of the Dodd-Frank Act, a Qualified Mortgage is a classification created for Mortgage Lenders to make it more likely that a borrower would be able to pay back the loan. Lenders will assess the borrower's Ability To Repay and the borrower has a few hoops to jump through to meet the standards.

Of course, if borrowers don't meet the criteria, they won't be approved for this mortgage. And while there are alternatives to a qualified mortgage, they may not have as favorable terms.

A qualified mortgage loan meets all the consumer protection requirements of the Dodd-Frank Act. Borrowers must have reasonable debt-to-income ratio (DTI), and lenders can't offer mortgage products with artificially low introductory monthly payments that sharply increase when the initial period ends.

What Are Qualified Mortgage Regulations?

Here are some of the rules lenders need to meet to issue a Qualified Mortgage. Qualified mortgages are prohibited from having the following:

• Risky Loan Features – this includes those that offer artificially low monthly loan repayments in the early years of the loan term, including Interest Only, Balloon, or Negative Amortization loans, or the notorious Subprime Mortgage.
• High Percentages - of borrowers' income going toward their overall debt. There are limits on how much of a borrower's income can go toward their debt. This is also known as their DTI Ratio, it used to be a flat 43%, but now to be considered a General QM under the New Rule, the APR on the loan must not exceed the average prime offer rate (APOR) for a comparable transaction by more than the following thresholds:

• For a first-lien transaction where the loan amount is greater than or equal to $110,260.00, the threshold is 2.25 percentage points.
• For a first-lien transaction where the loan amount is $66,156.00 or more, but less than $110,260.00, the threshold is 3.5 or more percentage points.
• For a first-lien transaction where the loan amount is less than $66,156.00, the threshold is 6.5 or more percentage points.

• Excessive Upfront Fees - the limit on costs and fees will vary by the size of the loan, but if they're over a certain threshold, the loan can't be considered a qualified mortgage.
• Length Of Loans - that is longer than 30 years.

What Is ATR? And Why Is That Important?

What is "Ability to Repay" (ATR)? According to the Bureau of Consumer Financial Protection, is:

"The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good-faith determination of a consumer's ability to repay a residential mortgage loan according to its terms. Loans that meet the ATR/QM Rule's requirements for QMs obtain certain protections from liability. The Bureau issued a proposal in August 2020 to create a new category of QMs, Seasoned QMs. The Bureau is now finalizing the proposal mainly as proposed. The final rule defines Seasoned QMs as first-lien, fixed-rate covered transactions that have met specific performance requirements over a seasoning period of at least 36 months, are held in the portfolio until the end of the seasoning period by the originating creditor or first purchaser, comply with general restrictions on product features and points and fees, and meet specific underwriting requirements.

A second temporary category of QMs defined in the ATR/QM Rule is the Temporary Government-Sponsored Enterprise (GSE). GSE is a quasi-governmental, privately-held agency established by Congress to improve credit flow in some United States' economic regions. A GSE provides financial services to the public for various things, particularly mortgages, through capital market liquidity.

GSE QM category, which consists of mortgages that:

(1) comply with the same loan-feature prohibitions and points-and-fees limits as General QMs, and (2) are eligible to be purchased or guaranteed by the GSEs while under the conservatorship of the FHFA. The Temporary GSE QM loan definition was previously set to expire with respect to each GSE when that GSE ceases to operate under conservatorship or on January 10, 2021, whichever comes first. In a final rule issued on October 20, 2020, and published in the Federal Register on October 26, 2020, the Bureau extended the Temporary GSE QM loan definition until the earlier the mandatory compliance date of final amendments to the General QM loan definition or the date the GSEs cease to operate under conservatorship or receivership (Extension Final Rule)."

In a May 2013 final rule, the Bureau amended the ATR/QM Rule to add, among other things, a new QM category—the Small Creditor QM—for covered transactions that are originated by creditors that meet specific size criteria and that satisfy certain other requirements. Those requirements include many that apply to General QMs, with some exceptions. Specifically, the threshold for determining whether Small Creditor QMs are higher-priced covered transactions and thus qualify for the QM safe harbor or rebuttable presumption is higher than the threshold for General QMs. Small Creditor QMs also are not subject to the General QM loan definition's 43 percent DTI limit, and the creditor is not required to use appendix Q to calculate debt and income. In addition, Small Creditor QMs must be held in a portfolio for three years (a requirement that does not apply to General QMs). The Bureau made several amendments to the Small Creditor QM provisions in 2015. These included: Amending the small creditor definition to increase the number of loans a small creditor can originate each year to 2,000; exempting from the 2,000-loan limit any loans held in the creditor's portfolio, and revising the small creditor definition's asset threshold to include the assets of any of the creditor's affiliates."

We told you it was convoluted! It all boils down to a set of regulations that more closely control the lenders' actions and further protect the borrower.

What is A "Qualified Mortgage"? And What Isn't.

We've talked a little bit about what makes a Qualified Loan… er, qualified. But here's a definitive list of other types of loans.

Interest-Only Payments –  An interest-only loan period is an agreed-upon period in which a borrower only pays Interest and no principal. The loan balance remains the same during this time unless you choose to pay the principal. The most significant benefit to these is the low monthly payment during that time.

Negative Amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest. Amortization means paying off a loan with regular payments so that the amount you owe goes down with each payment.

Balloon Payments mean a larger-than-usual one-time payment at the end of the loan term. In a mortgage with a balloon payment, payments may be lower in the years before the balloon payment comes due, but there might be a significant amount to pay off at the end of the loan.

Longer than 30-year loans are home loans with more extended payment terms than a standard 15- or 30-year mortgage. Like a 40-year mortgage?  If a homeowner remains in the property for the life of the loan and makes payments as agreed, they will pay the mortgage off in 40 years.

Fees that exceed 3% of the loan amount. Under the CFPB's rules, only Qualified Mortgages have a limit on points and fees. Lenders are not required to make Qualified Mortgages, so they can charge higher points and fees if they choose.  For a $100,000 or more loan amount: 3% of the total loan amount or less. $60,000 to $100,000: $3,000 or less. $20,000 to $60,000: 5% of the total loan amount or less.

No-doc loans mean a loan that doesn't require income verification from the borrower. Instead, this type of loan is approved on a declaration that confirms the borrower can afford the loan payments.

Everything Clear Now?

Probably not. The loan landscape is cluttered, shifting, and needs constant attention when seeking and initiating. Lenders would do well to consult specialists regarding the types of loans available and pick the right one for your borrower. Many lenders that have partnered with Mortgage Loan Processing firms rely on their expertise to clear the otherwise muddy waters of loans and loan origination. Check out a Mortgage BPO for a peek at how they can help your operation save time and money and enhance accuracy.