Starting this past January, the Consumer Financial Protection Bureau implemented new regulations that they hope will protect consumers against ‘risky’ lending practices. At the heart of these new regulations is QM, or Qualified Mortgage. We’ve asked Mike Bitrick of First Heritage Mortgage to answer a few questions on QM and how it is affecting loans and the loan process through the first few months of 2014.
What is QM?
Qualified Mortgage, or QM, is a new regulation just implemented in early January that aims to protect both consumers and lenders. In short, QM requires mortgage lenders to make sure that borrowers can actually afford their loans by setting specific guidelines that must be followed.
What are the specific guidelines for QM loans?
At this point, there are four main points to be aware of:
1. QM loans can not push a borrower’s debt-to-income ratio above 43%, with a few exceptions. For example, if the loan is eligible to be backed by Freddie Mac, Fannie Mae, FHA, USDA, or the Veterans Administration then the QM debt-to-income ration is not set in stone.
2. Loans cannot be longer than 30 years in length.
3. Loan amounts above $100,000 cannot have costs or fees that exceed more than 3% of the loan’s balance.
4. Lenders must be more stringent in verifying, documenting, and using the borrower’s income to approve the loan.
What’s an example of the income verification and documentation changes with QM?
Lenders must prove a history of stable income and the probability that income used to qualify will continue for at least three years. Examples of changes include spousal and child support income which now requires 6 months proof of receipt to use that income compared to the previous guideline of three months. Individuals with variable pay such as commission income, bonus income, overtime and shift differentials need more time on the job to use the variable income than previously required. Lenders are also paying more attention to job time and stability than before. Gaps in employment of more than 6 months are also scrutinized more heavily and require an acceptable explanation.
Is a lender allowed to make a loan outside of these QM guidelines?
Yes, lenders can still make non-QM loans. However, if a non-QM loan is made, the lender will have less protection if the borrower defaults. In addition, it may be more difficult for the lender to re-sell the loan.
How has the first few months of QM changed the loan process to this point?
QM does require more documentation from the lender and from the borrower than before. There is extra work that must now be done by both parties which can slow the loan approval process and frustrate the homebuyer.
How do you see QM evolving over the rest of 2014 and beyond?
The biggest impact in the future may come once Fannie Mae and Freddie Mac come out of government conservatorship. When that occurs Fannie Mae and Freddie Mac financing will no longer be exempt from the 43% debt ratio limit and could force otherwise qualified applicants to use alternative types of financing. Hopefully the Consumer Financial Protection Bureau will continue to review characteristics of high quality loans compared to underperforming loans and modify guidelines based on loan payment performance and economic conditions.Thanks to the great team at First Heritage Mortgage Charlottesville for helping us understand the ever-changing mortgage and loan process.