Last week, the Consumer Financial Protection Bureau’s (CFPB) new Qualified Mortgage (QM), also known as the ability-to-repay, rule went into effect. The new rule is about helping the borrower understand the true cost of the mortgage they apply for. It is also designed to keep lenders from lending money to borrowers who can’t afford to make those payments over time.
If it works out the way the CFPB has planned, the number of foreclosures should drop in the coming years, and, hopefully, some of the conditions that helped create one of the biggest real estate bubbles in U.S. history will be eliminated.
To be considered a QM, a lender may not charge excessive upfront points and fees (capped at 3 percent of the loan amount), and the loan cannot be longer than 30 years in length. Also, interest-only loans (also known as zero-down payment loans) and negative amortization loans (where the monthly payment doesn’t cover the true cost of the interest, so the total amount of the debt grows each month) will not be considered qualified mortgages.
In addition, the loans must fall into one of three categories:
- The monthly loan payment plus the borrower’s other debt payments cannot exceed 43 percent of the borrower’s gross monthly income;
- The loan must qualify to be purchased or guaranteed by a government-sponsored enterprise (such as Fannie Mae or Freddie Mac) or to be insured or guaranteed by a federal housing agency; otherwise,
- The loan must be made by a smaller lender that keeps the loan in its portfolio and does not resell it.
What does this mean for self-employed borrowers and small business owners? It means that qualifying for a loan could more than likely become more difficult due to not “fitting” in to the Qualified Mortgage QM type loans, although Lenders could offer other sorts of non-qualified mortgages (provided they verify that the borrower can repay that loan).