Overview Of Qualified Mortgage Rule
A Qualified Mortgage (QM), a type of loan with stable features that are defined by federal law, increases the likelihood you will be able to afford it.
Federal ability to repay (ATR) also requires lenders to make good faith efforts to ensure that you can repay your mortgage loan before you take it out.
Let's look at how QM laws and ATR laws affect you.
Property & Loan Types Covered
The Federal Reserve and Congress adopted the QM, ATR laws in response to 2008's financial crisis. They were then taken over by the Consumer Financial Protection Bureau (CFPB), a new regulator created after the crisis.
New ATR/QM laws by the CFPB were in effect beginning January 10, 2014. They apply to home loans for one-to-four-unit homes. These loan types are not available:
Credit lines for a home equity
Time-share plans
Reverse mortgages
Temporary and bridge loans for terms up to 12 months
A construction phase of 12 months or less of a construction-to-permanent loan
Secured vacant land for consumer credit transactions
Overview Of The QM Rule
The Qualified Mortgage rule prohibits the following risky loan features on a QM.
An "interest-only" feature allows you to pay only the interest on your loan each month without repaying the balance.
Negative amortization allows you to pay less interest each month than your monthly payment. Your loan balance can grow.
Balloon payments are required to repay the loan balance within a specified time period.
Lender terms of more than 30 years are not acceptable.
A debt-to-income ratio exceeds 43 percent, which means that your total monthly housing and other obligations exceed 43 percent of your income.
Higher fees and points than 3 percent of the loan amount are permitted. For loans less than $100,000, higher thresholds may be allowed.
These loans can be considered QM loans if the lender can prove that they don't include any of these features.
Overview Of ATR Rules
If the loan is a QM loan, the lender must show that they have followed the eight loan approval criteria listed below to comply with the ATR rule.
Verify the income and assets of the consumer that will be used to repay the loan.
Verify current employment status (if the lender uses employment income to assess the consumer's ability and willingness to repay).
Lenders are required to calculate the maximum monthly mortgage payment using the fully amortized amount and the introductory rate or fully-indexed rate.
In qualifying calculations, including monthly payments for simultaneous loans secured on the same property.
Monthly payments to homeowners insurance lenders are required for the consumer to purchase property taxes and certain other costs associated with the property, such as homeowners association dues, ground rent, or ground rent.
Including debts, child support obligations, and alimony.
Calculate the monthly debt-to-income ratio or residual income by adding all non-mortgage and mortgage obligations to your gross monthly income.
Credit history verified
Although lenders can consider additional factors, to comply with ATR rules for QM loans, they must consider these eight factors. Consumers have certain rights and protections if they do. If you feel they did not verify your ability to repay the loan, you can contact CFPB for assistance.
Can You Get A Loan That Doesn't Meet QM Standards?
Some borrowers might feel that they aren't eligible for a loan due to their debt-to-income ratio exceeding 43 percent. Or they may want an interest-only loan.
These loans are still possible, but it wouldn't be QM. Lenders can make non-QM loans, but they must be aware that they might apply their own approval standards, which may be stricter than those set out by the ATR.
To assess your situation, you need to locate a lender in the area. They will review your profile and give you advice.