The CFPB (Consumer Financial Protection Bureau) has created new sets of laws to guide mortgage lenders in making qualified mortgages. Their intentions are to protect against the risky lending practices that contributed to the housing market collapse in 2008. Starting January 10, 2014 lenders must adhere to these guidelines in order to issue QM loans.
Ability to Repay
Lenders must follow the “Ability to Repay Rule” in order to meet QM requirements. The Ability to Repay Rule passed legislation in January of 2013 as a part of the Dodd Frank Act. (http://1.usa.gov/1bP8WyK) The rule indicates that lenders must do their due diligence to verify that the borrowers can afford the monthly obligation of their new loan.
Debt to Income Ratio
A QM does not extend borrowers past 43% debt to income (DTI) ratio. A lender calculates DTI by adding all of the monthly debt obligations (including the new mortgage payment) for the borrowers and dividing it by the total gross income for the borrowers. The purpose of this is to avoid overextending borrowers beyond a point that they can afford monthly.
The new rules for QM regulate the type of loans that lenders can issue. Loans that have negative amortization, interest-only payments or balloon payments do not meet QM criteria. Some examples of loans that are considered QM would be fixed rate loans and adjustable rate mortgages. However, the QM guidelines do not specify any criteria for downpayment.
The maximum loan term for a QM loan is 30 years. Any loans beyond that are considered higher risk loans.
QM guidelines also regulated the points fees associated with loans. Discount points and fees must be less than or equal to 3 % of the loan. This rule protects borrowers from exorbitant fees associated with higher risk loans and predatory lending.
The new laws surround QM protect both lenders and borrowers. By assuring that a loan is being made to qualified loan applicants it protects lenders against default and borrowers against losing assets.