The Consumer Financial Protection Bureau (CFPB) amended Regulation Z, which implements the Truth in Lending Act (TILA), to prohibit lenders from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. (In other words Congress wants to make sure loans are really, really, really “safe” to prevent another mortgage crisis). Qualified Mortgages (QM) guidelines effect loans originated on or after January 10th, 2014. QM standards are only applicable to owner occupied properties and second homes (i.e. QM is not applicable to investment properties). For a first lien loan to be considered a Qualified Mortgage it must meet these guidelines:
A QM loan cannot have any “risky” features (such as Interest Only Payments, Balloon Payments, Prepayment Penalties, loan terms greater than 30 years, or have a Negative Amortization feature).
The QM fee threshold is as follows:
- 3% of the total amount financed for a loan greater than or equal to $100,000
- $3,000 for a loan greater than or equal to $60,000 but less than $100,000
- 5% of the total amount financed for a loan > or equal to $20,000 but < $60,000
- $1,000 for a loan greater than or equal to $12,500 but less than $20,000
The fees included in these caps are:
- any points (origination or discount points)
- any fees paid to the lender directly (like the underwriting, processing, admin fees, etc.)
- non-refundable Single Paid MIP or Split Paid MIP
- refundable single upfront MIP or Split upfront MIP that exceeds 1.75%
Conforming Loans must receive an approved eligible from underwriting. Jumbo Loans must have a DTI less than 43% to be considered a QM loan. FHA Loans can still be underwriting manually however those manual loans will not have “safe harbor” and must have a credit score of 620 or higher with a max DTI of 43%.
Assuming a loan meets all the aforementioned criteria it can be considered a Qualified Mortgage. If a loan does not meet all these criteria then alternative financing options would need to be explored. As always, please feel free to Contact Us if you have any questions or would like to discuss a specific scenario.