January 10, 2014 new QM rules (qualified mortgage) will go into effect and will most likely negatively impact the ability of some home buyers to obtain a mortgage. In terms of how many borrowers the new rules will affect, it is hard to say. There have been several analysis’ done of the percentage of home loans originated in 2012 would not have met the QM rules and the estimates vary from 12 percent to more than half. Personally, I think the lower estimates are probably closer to accurate, but it is still a significant number…potentially somewhere around 1 of every 9 home buyers may not be able to obtain a mortgage that, absent the new QM rules, would have been able to.
UPDATE 12/06/13 – Read/download the CFPB Compliance Guide for new QM rule
Watch CFPB Video on QM Rule Here
What are the QM Rules and who do they affect?
QM stands for “Qualified Mortgage” which is something the Consumer Financial Protection Bureau (CFPB) came up with to give lenders a “safe harbor” for the “Ability to Repay” (ATR) requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the act, lenders are required to, at a minimum, generally consider eight factors when underwriting a home loan to comply with the act:
- Current or reasonably expected income or assets;
- Current employment status;
- The monthly payment on the covered transaction;
- The monthly payment on any simultaneous loan;
- The monthly payment for mortgage-related obligations;
- Current debt obligations, alimony, and child support;
- The monthly debt-to-income ratio or residual income; and
- Credit history. Creditors must generally use reasonably reliable third- party records to verify the information they use to evaluate the factors.
If a lender fails to comply with the ATR requirements of the act and the borrower defaults on their loan as a result, the lender could have legal liability. Therefore, the act provided for the ability for lenders to obtain protection from such claims by only doing qualified mortgages (QM). So, while it is not mandatory that lenders do QM loans, for all intents and purposes it might as well be because no lender is going to want to pass up the protection from liability under the ability to pay requirements and therefore is going to stick to QM loans.
What is a QM loan and how is a QM mortgage different than a mortgage today?
While the ability to repay requirements addresses the ability for a borrower to repay a loan, the QM loan requirements have specific guidelines affecting the type of loan and terms of the loan itself that are permitted. For the mainstream borrower with solid credit, a steady job and a normal downpayment, I don’t think there will be any effect noticed. However, for the buyers closer to the fringe, whether in terms of credit, income or down payment, they will run into hurdles and, in many cases most likely, not be able to find a mortgage.
Below are some of the general requirements of a QM loan:
- The following types of loans are prohibited:
- Loans with negative amortization;
- Interest-only loans
- Loans with balloon payments
- Loan terms exceeding 30 years
- So-called “no-doc” loans where the creditor does not verify income or assets.
- Loans where the total amount of points and fees paid by the consumer exceed 3 percent of the total loan amount (although certain “bona fide discount points” are excluded for prime loans)
The Consumer Financial Protection Bureau prepared a chart comparing the QM (qualified mortgage) loan requirements to the ATR (ability to repay) which you can view and download here.
My advice? If you are thinking of buying a home in the near future and have any concern about your ability to qualify, or find the type of mortgage you need under the new QM rules, buy now! If you would like help doing this, or have more questions about the info in this article, please contact me using the form below:
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