The latest buzzwords in the mortgage industry are “Qualified Mortgage (QM)” and “Ability-to-Repay (ATR).” These concepts are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and provide specific guidelines for the origination of residential mortgages.
As of January 10, 2014, mortgage lenders have to abide by specific lending guidelines set by the Dodd-Frank Act and enforced by the Consumer Financial Protection Bureau (CFPB) in order to benefit from protections from consumer lawsuits.
A qualified mortgage has limits on loan features and requires verification of all income, assets, and debt. A qualified mortgage will have no negative amortization, balloon payments, or terms that exceed 30 years. To be considered a qualified mortgage, points and fees are capped at 3%. The debt-to-income (DTI) ratio is capped at 43% for loans not eligible for purchase by Fannie Mae, Freddie Mac, or guaranteed by FHA, VA, or USDA Rural Housing.
These standards were enacted to verify a borrower’s long-term ability to repay their mortgage. If these standards are met, the loan is considered a qualified mortgage (QM) that meets the ability-to-repay (ATR) rule.
The industry is assessing the impact of these new regulations. Many experts believe lenders will have less flexibility when originating loans and will be less likely to make exceptions to their underwriting criteria. Industry experts also expect to see a much larger impact on consumers seeking non-conforming or jumbo mortgage loans that are above the 43% DTI requirement.
The ability-to-repay rule is intended to prevent consumers from getting mortgages that they cannot afford and prevent lenders from making loans that consumers cannot repay. The impact on the real estate industry remains to be seen.
By Bob Strandell, Bell Mortgage