How the Qualified Mortgage Rule Affects You

Tuesday, March 25, 2014

Ever since the financial crisis of 2008 and the subsequent meltdown of the US housing market, the federal government has been on a tear creating rules to prevent a recurrence of the problems that led to the crisis.

The fact is that lenders will never make the types of loans that were being done at that time, ever again. The primary culprits of the lending problems were Sub-Prime Credit Loans, No Income / No Asset loans, negative amortization loans and mortgages with zero down payment or negative equity. All of those programs went bye bye 6 years ago and Lenders have universally created much tougher lending standards on their own that are already making it difficult for some credit worthy borrowers to get financing.

This new rule, issued by the Consumer Financial Protection Bureau (CFPB), known as the Qualified Mortgage Rule (QM) sets a new standard that is making it even harder for some borrowers to obtain home financing. Basically, the rule states that if a mortgage lender makes a loan that does not meet certain standards then that lender is not protected from the borrower claiming the loan should never have been made. This could leave the lender vulnerable in the event that the borrower stops making their house payments and goes into foreclosure.

The requirements for a loan to be considered a Qualified Mortgage include the following:
1. Certain "harmful features" are not permitted - Balloon Payments, terms longer than 30 years, an
"interest only" payment feature, and negative amortization.
2. No excess upfront points and fees - for most mortgage loans there is a limit set that loan fees should
not exceed 3 percent of the loan balance (can be more for smaller loans)
3. A limit as to how much of your income can go towards your debt - known as your debt to income ratio.

The CFPB has set that limit at 43% (total monthly payments shall not exceed 43% of gross income). If the loan meets these requirements then it is believed the lender has made a good faith effort to ensure the borrower has the ability to repay the loan and therefor made a qualified mortgage. The only problem with this rule relates to drawing a line in the sand on debt to income (DTI). In the past, sometimes a high DTI ratio could be found acceptable if there were "compensating factors". This could mean the borrower had a lot of money in the bank, some income that was not being factored in or a history of being able to make similar payments. For example, if my DTI was 55% but I had $1,000,000 in the bank my loan would likely be approved because I had significant assets to support my ability to make payments. Under the QM rule lenders lose the discretion to make loans like this that would otherwise be approved.

Loan approval standards are already very strict and loan programs that created problems in the past have all been eliminated. I understand the good intentions of the CFPB but the bottom line is that lenders need to make loan decisions on the merits of an individual loan and not based on dictates from the federal government.

Ken Mascia, Licensed Loan Officer, NMLS 135323
(248) 644-1200, ext 15


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