A Qualified Mortgage (QM) is a loan type, with features outlined by federal regulations to help ensure that you can manage the payments effectively. Moreover, according to the ability to repay (ATR) law lenders must sincerely assess your capability to repay the mortgage before granting it.Let’s explore how these QM and ATR regulations can impact you.
Covered Properties & Loan Varieties
Following the 2008 crisis caused by mortgage lending practices the QM and ATR laws were introduced by the Federal Reserve and Congress before being overseen by the Consumer Financial Protection Bureau (CFPB) a newly established regulator post crisis.
The CFPBs updated ATR/QM rules went into effect for home loan requests starting January 10 2014. Are applicable to loans for single family homes, up to four units, including condos and cooperative housing units.
Some types of loans that are not considered include;
- Home equity lines of credit
- Time share plans
- mortgages
- term or temporary loans, with a duration of 12 months or less
- The construction period of 12 months or less for a construction to permanent loan
- Consumer credit deals secured by empty land
- Overview of the Qualified Mortgage Regulation
Under the Qualified Mortgage rule certain risky loan features are not allowed in a QM;
- An “interest only” option where you only pay the loan interest each month without reducing the loan balance.
- Negative amortization, which lets you pay less than the monthly interest due causing your loan balance to increase.
- Balloon payments that require you to settle the remaining loan balance after a specific number of years into your loan term.
- Loan durations exceeding 30 years.
- A debt to income ratio over 43 percent, indicating that your total housing and non housing obligations surpass 43 percent of your income.
- Points and fees exceeding three percent of your loan amount (for amounts, below $100,000 higher percentage thresholds are permissible).
- If a lender can confirm that their loans do not possess any of these characteristics those loans are classified as QM loans.
Summary of ATR Regulations
In the case where the loan qualifies as a QM a lender is required to demonstrate adherence, to eight factors for loan approval detailed below to meet the ATR rule;
1. Confirming the expected income or assets (excluding the propertys value) that the borrower plans to use for loan repayment.
2. Validating the employment status (in cases where employment income is considered in assessing repayment ability).
3. Calculating the monthly mortgage payment for the loan using either a fully amortized payment or the introductory/fully indexed rate whichever is greater.
4. Accounting for payments on any loans secured by the same property in qualification assessments.
5. Including payments for homeowners insurance, property taxes and other related costs like homeowners association fees or ground rent.
6. Factoring in debts alimony payments and child support obligations.
7. Computing either the debt, to income ratio or residual income using all mortgage and mortgage obligations mentioned above as a proportion of gross monthly income.
8. Verifying credit history.
Lenders have the option to take into account aspects. They are required to assess a minimum of these eight factors in order to adhere to the Ability, to Repay (ATR) regulations regarding Qualified Mortgages (QM). By doing they receive safeguards against legal challenges, from consumers.
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