What Is a Qualified Mortgage?
A qualified mortgage is a mortgage that meets certain requirements for lender protection and secondary market trading under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Qualified Mortgages Explained
Qualified mortgage protection began in January 2014, and provides legal protections for lenders who follow certain regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Requirements are based on analysis of the borrower's ability to repay based on income, assets, and debts. Parameters require that the borrower has not taken on monthly debt payments in excess of 43% of pre-tax income; that the lender has not charged more than 3% in points and origination fees; and that the loan has not been issued as a risky or overpriced loan with terms such as negative-amortization, balloon payment, or interest-only mortgage.
Qualified mortgage rules were developed to help improve the quality of loans issued in the primary market and available for trading in the secondary market. Lenders have certain protections with qualified mortgages. Also, only certain qualified mortgages are eligible for sale in the secondary market.
Qualified Mortgage Protections
Under qualified mortgage rules, “safe harbor” provisions protect lenders against lawsuits by distressed borrowers who claim they were extended a mortgage the lender had no reason to believe they could repay. However, the rules also protect both borrowers and the financial system from the risky lending practices that contributed to the subprime mortgage crisis of 2007. They also provide incentives for lenders who wish to sell their loans in the secondary market since qualified mortgage loans are more appealing to underwriters in structured products deals.
Lenders who issue qualified mortgages can more easily resell them in the secondary market to entities such as Fannie Mae and Freddie Mac. These two government-sponsored enterprises buy most mortgages, which frees up capital for banks to make additional loans. Overall, qualified mortgage rules were enacted to help lower the risk of mortgages by creating greater incentives for offering higher quality mortgage loans in both the primary and secondary markets.
Qualified Mortgage Exceptions and Considerations
There are several exceptions to qualified mortgage rules. One exception is that points and origination fees may exceed 3% for loans of less than $100,000 (otherwise, lenders might not be sufficiently compensated for issuing such loans, and these smaller mortgages might become unavailable).
Qualified mortgage regulations do allow lenders to issue mortgages that are not qualified, but the rules limit the sale of these loans into the secondary mortgage market and provide fewer legal protections for lenders.