A Qualified Mortgage is a category of loans that have certain, less risky features that help make it more likely that the borrower will be able to afford the loan. A lender must make a good-faith effort to determine that the borrower has the ability to repay the mortgage before they take it out. This is known as the “ability-to-repay” rule. If a loan is a Qualified Mortgage, it means the lender met certain requirements and it’s assumed that the lender followed the ability-to-repay rule. Generally, the requirements for a Qualified Mortgage include:
- Certain risky loan features are not permitted, such as interest-only payments or terms longer than 30 years.
- A limit on the price of the loan. The annual percentage rate, or APR, on a Qualified Mortgage cannot be higher than a particular threshold. This threshold can depend on the type or size of the loan.
- No excess upfront points and fees. If a borrower gets a Qualified Mortgage, there are limits on the amount of certain up-front points and fees the lender can charge. These limits will depend on the size of the loan. Not all charges, like the cost of FHA insurance premiums, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be considered a Qualified Mortgage.
- Consider and verify income or assets and debts. For a loan to be a Qualified Mortgage, the lender must consider and verify the borrowers current monthly income or assets (other than the value of the property that will secure the loan) and their debts.
Qualified mortgage rules were developed to help improve the quality of loans issued in the primary market (and that ultimately may become available for trading in the secondary market). The majority of newly-originated mortgages are sold by the lenders into the secondary mortgage market. In the secondary mortgage market, newly-originated mortgages are packaged into mortgage-backed securities and sold to investors, such as pension funds, insurance companies, and hedge...
