QM, or the qualified mortgage rule, kicks in Jan. 10.
That means that mortgage lending is about to change somewhat as lenders deal with QM changes and work to meet all the rules they must follow to make a qualified mortgage. If you’re feeling confused—it is a tricky subject—this QM Q&A should clear some things up.
What is QM?
QM is the qualified mortgage rule and it sets standards and practices for how lenders should make loans. To be a qualified mortgage, the loan cannot have excessive upfront points and fees (they should not total more than 3 percent of the loan’s value). It cannot be longer than 30 years and cannot have risky features, such as a loan where the borrower only pays interest or one where the borrower is paying less than the full amount of interest so that the total debt grows each month. It must also follow the 43-percent debt-to-income ratio, meaning that the borrower’s total monthly debt payments cannot exceed 43 percent of his or her gross monthly income.
What is the ability-to-repay rule?
Think of the ability-to-repay rule as a checklist that lenders must follow when looking at a borrower’s credentials. Lenders must “consider and verify” the borrower’s existing mortgage-related obligations, such as a current mortgage or second mortgage, the borrower’s income or other assets, employment status, any other loans such as a student loan or car loan, any debt alimony or child support, and other residual income and the borrower’s credit history. Although the rule doesn’t set any kind of standards for these, such as a certain amount of income or credit score, the lender must gather up documentation to prove that the borrower has the income, assets—without too much debt—to pay back the loan.
So some people say this will help borrowers avoid being “trapped and tricked.” How?
By eliminating loans that were bad for consumers, such as the negatively amortizing loan, interest-only or balloon payments, borrowers cannot be tricked into taking one of these bad loans. Before the housing crisis, predatory lenders would frequently use these loans to get borrowers a mortgage that needlessly cost them more money. By making sure that borrowers can reasonably afford to repay the loans, borrowers may avoid being trapped by a loan they shouldn’t have had in the first place, another shady practice that took place before the housing crisis. These rules were written to essentially fix the mistakes of the past and avoid repeating history.
Can the big banks really be trusted to follow the rules?
There is an incentive for lenders to make qualified mortgages. By doing so, they will qualify for safe harbor, which is designed to protect lenders who make loans that meet all the criteria from QM from borrower lawsuits. But there’s a flip side to that—lenders will have to be able to prove they made a QM loan by showing all the documents the borrower provided. So that means lenders will take the documentation very seriously—so borrowers need to be prepared to provide loads of it.
But, will this make mortgages hard to get?
For some people, yes, but not for everyone. Beyond the documentation requirements, which are a small added burden, some borrowers may find it harder to qualify because they are self-employed, have inconsistent income or have too much debt.
What if I don’t qualify for a QM loan?
There are a few exceptions where lenders don’t have to write QM loans (any lender, of course, can choose to make a non-QM loan, but the instances will be rare because the lender’s liability is so much higher). If a loan qualifies for purchase or guarantee by Fannie Mae or Freddie Mac, it does not have to meet QM. However, keep in mind that the Federal Housing Financing Agency directed the pair to limit their purchases to qualified mortgages, but they will still accept loans that exceed the 43 percent debt-to-income ratio.
I’ve heard there are down payment requirements, is that true?
Will this slow down mortgage lending as banks deal with these changes?
Bankers say that initially yes, it will. Banks have to establish new computer systems and retrain staff to deal with these changes and so, for the first three to six months of the year, mortgage lending may slow. But the effect will only be temporary, lenders say.