New Qualified Mortgage Rule – What You Need to Know
NAR has been actively involved in shaping the debate and structure of the Qualified Mortgage (QM) Rule issued by the Consumer Financial Protection Bureau (CFPB) created by the Dodd-Frank Reform Act. NAR achieved a significant victory in obtaining a safe harbor in the QM rule for loans underwritten to the automated standards of Fannie Mae/Freddie Mac, the Federal Housing Authority, Veterans Administration and Rural Housing Service (within their respective loan limits) for up to seven years.
For Fannie and Freddie, the safe harbor is for seven years or whenever they leave conservatorship, whichever comes first. Additionally, loans outside of those backed by the government that do not have risky features and do not have a total debt to income (DTI) of greater than 43 percent will receive safe harbor protections. The 43 percent DTI cap basically means that if all your debt expenses (including total mortgage payment) do not exceed 43 percent of your gross income (before taxes are withheld) you will qualify for a QM. Other more risky loans that meet the other criteria but exceed 43 percent DTI will only receive rebuttable presumption protections.
Highlighted below are some of the issues contained in the 804-page QM rule that were of particular concern to NAR. The rule is scheduled to be effective January 10, 2014.
Key Elements in the QM Rule
Fees and Points
The rule requires numerous items to be considered in fees and points when determining for purposes of meeting the 3 percent cap. Most depend on circumstances too numerous to mention here., however two items jump out:
· There will be circumstances when all or part of appraisal fees will be included; and
· There will be times when private mortgage insurance will be included (but not FHA and other government guarantee or insurance fees).
Seller financers will not be covered by the rule as long as they do five or fewer transactions in any given year. This is a NAR victory though seller financing may be implicated in other Dodd-Frank rules yet to be released.
Balloon Loans in Rural Areas
The rule allows for limited balloon payment loans to be made in rural areas.
In a partial victory, the CFPB upped the small loan threshold from the proposed $75,000 to $100,000 and established a tiered fees and points approach that raises the 3 percent as loans get smaller in size from $100,000.
Underwriting Standards for some Jumbo Loans
The biggest area of concern with regard to the underwriting standards for QM will be jumbo loans with DTI in excess of 43 percent. Although loans with these characteristics represent a relatively small percentage of the market, the new QM rule could affect lending in some high cost areas. Another area of concern regards manually underwritten loans for all loan amount levels with DTI in excess of 43 percent may also suffer.