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New Qualified Mortgage (QM) Rule Now in Effect

Last week, new guidelines for loan requirements took effect under The Consumer Financial Protection Bureau's Qualified Mortgage (QM) Rule. The new rule, which took effect on January 10, sets forth basic requirements for lender underwriting and is designed to help avoid the borrowing catastrophes that caused the housing crisis.  However, the QM Rule also has the potential to make mortgage availability more difficult for some, since it requires the originator of the loan to verify all sources of income and assets and prove the borrowers has the ability to repay the mortgage.

One of the guidelines’ requirements is that borrowers must have a maximum debt-to-income ratio of 43 percent. Debt-to-income ratios have already been in place but the new rules won't allow for any compensating circumstances. That means that not even a significant down payment or a large cash reserve will be allowed to offset a higher debt ratio.

Notably, origination fees will be limited under the QM requirements, which could make getting a smaller loan more difficult. Origination loan fees will be limited to no more than 3 percent of the loan amount. This could make mortgage lenders less likely to offer smaller loan amounts because they may not always be able to recoup their costs and make a profit. 

Additionally, a new "ability-to-repay" guideline also could make it more difficult for self-employed borrowers, like REALTORS®, to be approved for a mortgage.  And, a number of loan types are prohibited from receiving the QM status, including those with negative amortization (balloon payments), interest-only features, and those with durations greater than 30 years. 

The incentive to follow these guidelines is huge for the lender. If the mortgages don't meet the QM guidelines, the lender will be required to hold the loan as opposed to selling it to Fannie Mae and Freddie Mac.
Finally, the QM requirements potentially may have lower loan limits for conventional conforming loans. The agency that regulates Fannie Mae and Freddie Mac, The Federal Housing Finance Agency, will delay its normal adjustment of loan limits from January 1, 2014 to sometime later in the year. The agency is trying to see what kind of impact the new QM guidelines will have on the housing industry. For most housing markets, the current limits are $417,000 and up to $625,000 in high-cost areas. How these figures will change remains to be seen in 2014.