New rules will be coming into effect for the Qualified Mortgage stipulations starting in early 2014. Let’s review some of the most important facets of these new rules to get you up to date.
What’s A Qualified Mortgage?
A qualified mortgage came about under the Dodd-Frank Act, which was passed in 2010. This rule creates new categories of mortgages that puts into place minimum underwriting requirements for the majority of home loans. These minimum underwriting standards are referred to as the requirement on ability to be paid. In order to qualify for one of these loans, an individual must be able to pass the points and fees test associated with that mortgage. One of the other accomplishments of this rule is that exotic mortgages can no longer be offered. Exotic mortgages are those with interest only loans, or balloon mortgages.
For the most part, these rules detail that there are greater requirements in place for lenders, especially with regard to documentation.
What’s Changing Regarding Fees and Points?
One of the biggest factors used to identify a qualified mortgage under the Dodd-Frank Reform Act is an examination of the points and fees included. In order to qualify, a mortgage must not charge more than 3% of the mortgage value in points and fees. The QM rule requires that many different components be considered in the determination of this 3%. There are specific circumstances, one part or all of the appraisal fees can be included. Some of the changes recommended include:
- Counting affiliate fees and points towards the total cap, which disadvantages firms with affiliates and therefore reduces consumer choice
- Requiring that escrow for property insurance still counts towards the 3% cap when affiliates are involved in the transaction and it’s not entirely clear whether escrow for taxes counts or not.
- Counting “Loan Level Price Adjustments” towards the cap.
Is Anything Changing With Seller Financing?
Seller financers will not be covered by this rule. As long as they only engage in five or fewer transactions in a calendar year. These financers will still be required to follow the rules outlined in the CFPB’s Loan Originator Compensation Rule, which mandates registration of seller financers who complete three or more transactions in one year.
Anything New For Jumbo Loans?
Some underwriting standards are changing with regard to Jumbo loans. For example, this rule might impact the cost and availability of mortgages that are over the lending limit set by Congress for Fannie Mae, FHA, and Freddie Mac loans.
Jumbo loans are classified as those mortgages above the dollar limits set by Congress. Presently, the limit for Fannie Mae and Freddie Mac is any loan more than $417,000 and $625,500 in high cost locations. For FHA loans, this is any amount greater than $729,500.
This new rule might make it more difficult to locate and obtain mortgages with amounts higher than these set amounts.
What About Low Dollar Amount Loans?
The small loan threshold was increased from the recommended $75,000 to $100,000 and created a tiered fees and points approach that increases the 3% amount as loans start to get smaller in size starting with $100,000.
The costs connected with providing a home loan, when fixed, could make it unprofitable for a lender to engage in a low Dollar amount loan otherwise.
What’s This I Hear About Balloon Loans in Rural Areas?
Many properties in rural locations don’t stack up to typical lending criteria. For the most part, as is due to the lack of comparable properties, among other factors. The new rule allows balloon mortgages in rural and underserved areas to continue on a limited basis. This gives a great deal of flexibility to these lenders in rural locations.
What Else Do We Need To Know?
Since this new rule is going into effect so quickly, it’s important to stay on top of news events and other issues related to its official rollout. Of course, reading the actual text of the document can be very confusing, so continue to watch industry blogs and news reports about the impact. In general, the revision of this rule seems to be a step towards better underwriting practices. It’s also possible that this rule could continue to evolve into the future, so increased stipulations and requirements might be enforced over time. Fully understanding whether this change affects you or not, and developing systems for adapting to this rule, will be crucial for long-term success.