The Consumer Financial Protection Bureau, also known as the CFPB, has rules guiding the mortgage industry. Any loan that complies with the set rules is called a Qualified Mortgage, and non-compliant mortgage loans are said to be non-qualified mortgage loans. A QM or Qualified Mortgage is a home mortgage that meets the standards set by the federal government.
The Consumer Financial Protection Bureau in a bid to protect borrowers and other such consumers set the Qualified Mortgage Rule. This led to the prohibition and limit of specific high-risk products and features.
Features of Qualified Mortgage Loan
The Consumer Protection Act and Dodd-Frank Wall Street detailed the features of a qualified mortgage and the features are highlighted below.
- No Excessive Fees and Upfront Points – this highlights one of the major goals of Consumer Financial Protection. Lending institutions are prohibited from charging excessive fees. These limits will depend upon the loan amount, if the points or fees exceed the limit, the loan can’t be a Qualified Mortgage.
- No Toxic Loan Features – this is also part of the measure designed to protect consumers from exploitation. No Negative Amortization Loans, interest-only loans or balloon loans. No loan term should be no more than 30 years
- Limits on DTI ratios – there is a general rule of 43% debt-to-income ratio for a qualified mortgage. This means that the borrower’s debt-to-income ratio must not be higher than 43 percent.
In addition to the features and limits mentioned above, loans that can be sold or insured by Fannie Mae, Freddie Mac, VA or FHA has a temporary exception. However, no other exceptions are granted, and any other type of home mortgage loan that is not in conformity with the rules above is considered a Non-QM loan.
One of such Non-QM loans is the interest-only loan offered by some lending institutions. Such loans are particularly targeted at wealthy borrowers. The rule set by the Consumer Financial Protection Bureau requiring lending institutions to document the borrower’s ability to repay the mortgage loan is removed from being seen as QM. This is because some borrowers face payment shock once they are required to start paying the principal.
Lenders are required to strictly follow the compliance issue with the ‘Ability to Repay’ rule. The eight underwriting factors of the rule are mentioned below.
- The current assets and income of the borrower
- The current employment status of the borrower
- The borrower’s monthly payment on the concerned transaction
- The borrower’s monthly payment on any other loan running simultaneously
- The borrower’s monthly mortgage-related payments
- The current debt obligations of the borrower including child support payments and alimony
- The monthly DTI ratio or residual income of the borrower
- The credit history of the borrower
The factors mentioned above should be considered and documented by the lending institutions originating the loan.
Non-Qualified Mortgage Loan Programs
Now that we know what qualified mortgage programs are and their features, it is important to discuss non-QM loans.
- Alt-QM Asset
- The borrower qualifies based on the verification of his or her liquid assets
- It is required that assets are documented properly to cover the amount being requested. An additional sixty months reserve is required to cover all installments, revolving and miscellaneous debts
- Assets can be in stocks, bonds, IRA’s, 401k’s, mutual funds, cash in the bank or any retirement accounts.
- Borrowers are required to provide 12 months consecutive statements for the verification of their asset
- Underwriting does not require tax returns
- Alt-QM Investor
- Designed for experienced realtors that are purchasing or refinancing their investment properties for business purposes
- Borrower’s qualification is a function of his or her cash flow of the property in question, especially the debt coverage ratio
- Tax returns are not required, and borrowers need not state their income
- Alt-QM Jumbo
- Designed for borrowers with high credit quality
- Maximum debt-to-income ratio of 50 percent
- Maximum cash out of five hundred thousand
- Foreign nationals can apply for the program
- Alt-QM Agency
- Designed for borrowers with high credit quality that have loan parameters but do not meet the guidelines set by Fannie Mae and Freddie Mac
- Loan amount cannot be more than high balance or conforming loan limits
- 43 percent debt-to-income ratio and a maximum of 50 percent with compensating factors
- Alt-QM Income
- Designed for self-employed borrowers that have at least two years of self-employment history
- The qualifying income of the borrower is calculated by twelve months most recent bank statements as a substitute to tax returns
There are several Texas home mortgages available to home buyers. However, to get the best mortgages, prospective borrowers are advised to seek professional help.