At the moment, there are three main types of Qualified Mortgages, as outlined by the Consumer Financial Protection Bureau (CFPB).
Let’s explore the definition of each of them to see what’s available in today’s marketplace.
Type 1: General QM Loans
These loans must be underwritten using a fully-amortized payment with the maximum interest rate permitted during the first five years after the date of the first payment.
Underwriters must consider and verify consumer’s income or assets, current debt obligations, and alimony/child support obligations (if applicable).
The borrower’s monthly DTI ratio may not exceed 43%. However, mortgages eligible for purchase or guarantee by the FHA, VA, or Rural Housing Service (USDA loans) do not have a maximum DTI requirement, and are considered Qualified Mortgages by virtue of the regulations issued by those agencies.
Lastly, the points and fees on QM loans may not exceed the points-and-fees caps established under the rule, which is generally 3% of the total loan amount.
Type 2: Temporary QM Loans
Loans that meet the “Temporary QM” definition must meet all of the same requirements as the General QM loans.
Additionally, they must be eligible for purchase or guarantee by Fannie Mae or Freddie Mac
However, they are not subject to the 43% maximum DTI ratio threshold that applies to General QM loans.
This category of QM loans will expire by no later than January 10, 2021, but likely earlier once the GSEs exit federal conservatorship and the specified federal agencies own QM rules take effect.
Type 3: Small Creditor QM Loans
The final category deals with QM loans made by small creditors that are held in their own portfolio.
An organization is considered small if it has less than $2 billion in assets and originates fewer than 500 first-lien mortgages per year.
They have the same requirements as General QM loans, though there is not a specific DTI limit (however, it still must be verified).
Balloon Payments & QM
There are also a couple of subcategories of QM loans under the small creditor umbrella that allow for a balloon-payment feature.
These types of loans can only be originated if more than half of the organization’s first-lien covered transactions in the prior calendar year have been secured by properties in rural or underserved areas.
However, small creditors will be able to offer balloon payments until January 10, 2016 even if they don’t meet the rural/underserved quota.
Safe Harbor vs. Rebuttable Presumption
Importantly, the Dodd-Frank Act provides that ‘‘qualified mortgages’’ are entitled to a presumption that the originating lender satisfied the ability-to-repay (ATR) requirements.
However, there are two different types of legal presumption of compliance, including conclusive (safe harbor) and rebuttable.
In the case of safe harbor, a borrower cannot challenge whether the bank or lender met its ATR obligation. This is most desirable outcome for the lender, so they will strive to originate so-called “Safe Harbor QMs” if at all possible.
As the rebuttable name implies, the borrower has the ability to challenge the lender’s compliance with the ATR rule, but must still provide evidence to attempt to rebut that presumption.
The APR of the loan is used to determine compliance type. QMs that are not higher-priced have a safe harbor.
QMs that are higher-priced have a rebuttable presumption, as defined by:
- A first-lien mortgage for which, at the time the interest rate on the loan was set, the APR was 1.5 percentage points or more over the Average Prime Offer Rate (APOR)
- A subordinate-lien mortgage with an APR that, when the interest rate was set, exceeded the APOR by 3.5 percentage points or more
For example, if the APOR is 5%, a first mortgage with an APR of 6.5% or higher would be considered higher-priced.
And a second mortgage with an APR of 8.5% would also be higher-priced.
Meanwhile, a Small Creditor or Balloon-Payment QM is higher-priced if:
- The APR when the interest rate was set exceeded the APOR by 3.5 percentage points or more, for both first-lien and subordinate-lien mortgages
Note that FHA loans have a different definition of higher-priced. The APR cannot be more than 1.15% plus the annual MIP above the APOR.
In late 2020, a similar type of QM was proposed, known as a Seasoned QM.
(QM definition source: CFPB)
Update: Just months after the rules were implemented, many lenders have begun offering non-QM loan products to take advantage of business that falls outside of these QM definitions.