On January 10, 2014, the Qualified Mortgage (or “QM”) rule will become effective and will apply to almost all residential mortgages originated in connection with home purchases. In order to support their clients through the home purchase and sale process, Miramar International agents should become familiar with the provisions of the QM rule and its likely impact on the mortgage application, qualification and underwriting process.
While the most recent housing crisis surely had many causes, few dispute that careless mortgage lending left too many consumers with loans they were ultimately unable to afford. In assessing possible market reforms that could prevent future crises, most regulators agreed that a mortgage lender should, at minimum, be required to determine that a borrower has the ability to repay his or her debt obligations.
Starting on January 10, 2014, a lender extending residential mortgage credit (e.g., a purchase loan, a refinance, a home equity loan) must make a “reasonable and good faith determination … that the consumer will have a reasonable ability to repay the loan according to its terms.” In other words, unless a lender has determined a consumer’s ability to repay a loan, that loan cannot be made.
In anticipation of this new rule, lenders became concerned about how a borrower’s “ability to repay” would be determined. Specifically, they worried that they would have liability or would be found out of compliance if a borrower ultimately proved unable to pay despite thorough mortgage underwriting. Some asserted, for example, that a borrower might have a job and verifiable income and assets now, but might later lose his job and become unable to meet the terms of his mortgage. In such a case, lenders worried that they would be required to repurchase delinquent loans or would otherwise face regulatory penalties or fines.
To create certainty with respect to the determination of a borrower’s “ability to repay,” Congress established a category of mortgages that provides lenders with a “safe harbor” from later penalties or buy-back demands. Specifically, if a lender’s mortgages meet the requirements of a “Qualified Mortgage” or “QM,” then that lender is presumed to comply with the “ability to repay” rules and regulations.
The specific details and definitions of a QM have been set out by the Consumer Finance Protection Bureau and can be found here. What Miramar International Real Estate professionals should understand is that QM imposes restrictions in three key areas that could affect a client’s ability to qualify for a home loan.
Restrictions on Loan Features
- Loan terms must be 30 years
- Interest-only loans are not allowed
- Negative amortization loans are not allowed
- Pre-payement penalties are very limited
Points & Fees
- For loans greater than $100,000, points and fees cannot exceed 3% of the loan amount
- For loans greater than $60,000, but less than $100,000, points and fees cannot exceed $3,000
8 factors must be evaluated:
- Current or reasonably expected income and/or assets
- Current employment status (or verification of self-employment status and income)
- The monthly loan payment calculated at the highest interest rate with fully amortizing payments
- Monthly payments on any simultaneous loans (e.g. seconds, home equity lines)
- Monthly payments for property taxes, insurance, HOA fees, etc.
- Debts, alimony and child-support obligations
- Monthly debt-to-income ratio calculated using all the obligations listed above
- Credit history
A borrower’s total debt to income ratio cannot exceed 43%
In the past, real estate professionals relied on mortgages with starter or “teaser” rates to help clients reach for more expensive properties. Under QM rules, a borrower’s “ability to repay” will be determined with reference to a fully-indexed rate, regardless of any “teaser” options or features. Borrowers have also become accustomed to maximum debt-to-income ratios up to 50%. A 43% ratio maximum therefore has strong implications for a borrower’s ability to qualify.
Take the example above. Assume that a consumer has verified and established gross income of $60,000 per year, monthly car payment(s) of $400, monthly credit card payments of $200, and monthly student loan payments of $300. Assume, also, that the consumer has excellent credit and sufficient cash assets to make a 20% down payment.
Now note the loan amounts for which the borrower can qualify under different debt-to-income ratio maximums.
In this example, assuming that a borrower has access to additional funds in order to make a 20% down payment, under a 50% allowable debt-to-income ratio, the consumer can purchase a $304,000 home. By dropping this maximum to 43% (the maximum under the QM rule), the same consumer is capped at a $230,663 purchase price (again, under a 20% down payment assumption).
All Miramar International real estate professionals should ask a mortgage professional to update any pre-qualification and/or pre-approval letters issued for their clients, and should have candid conversations with their clients about the price ranges of the houses they can now afford.
Most importantly, push to close any pending transactions before January 10, 2014!