QM - What Is It And How Might It Affect Your Buyer Or Seller?

Written by Posted On Saturday, 01 March 2014 12:50

On January 10, 2014, the Consumer Financial Protection Bureau (CFPB) implemented their new guidelines for mortgage loans. You may have heard the term Qualified Mortgage (QM) being used by your lender or loan officer, or heard something about them in the news lately. A qualified mortgage is one that offers the lender protections, so long as they comply with all of the CFPB guidelines. Lenders who make loans that are outside of the QM guidelines lose protection against the borrower suing them on the basis that the loan they obtained was unfair.

However, these new guidelines may make mortgages harder for borrowers to obtain and that has consequences for both Buyers and Sellers to consider when purchasing a home.

In order to qualify for a QM, lenders haven't changed the guidelines in collecting the data from independent third parties to verify income, assets, credit worthiness, debt obligations, and qualifying the property (appraisal) or calculating the monthly mortgage and monthly total debt expense. However, the back-end ratio of all debts, with the total monthly housing expense added in, is limited to 43%. There are a few variables that can come into play if the file is accepted by the automated underwriting systems. But, no one knows if those few exceptions will remain acceptable or not.

The unfortunate borrower is someone with lots of cash or someone with variable income (self-employed) whose ability to repay is compromised by no longer being able to use what was called "compensating"  factors, in determining the ability for the lender to raise the back-end ratio.

Essentially what that means is that let's say your retirement salary is $4,000 per month, but you have $1M in assets, been a long time homeowner, great credit, and have access to that $1M if you want to supplement your monthly income in order to make a higher mortgage payment. The lender can no longer "use"  those cash reserves as a way to allow you to purchase that home with a mortgage - you must qualify on your monthly income. Larger down payments may offset that ratio, but if it doesn't, then you won't be approved by most lenders. You may find a bank that will "portfolio"  the loan (not sell it to Fannie Mae, Freddie Mac, the VA or FHA), but they most likely will want a shorter term and a higher interest rate, since the loan will not be sellable in the secondary mortgage market.

If you are self-employed and one month things are tighter than another month - you may be in the same boat. Many self-employed individuals leave their monies in their companies in order to be solvent each month and take out only what they need to live each month. If they need more income to qualify for a QM, then they will have to pay themselves an increased salary amount for a probable six months or more in order for the lender to consider that new income in their qualification for the loan.

These two scenarios are sure to cause problems for many Buyers (and Sellers), as either one could put a purchase transaction in danger of not coming to fruition.

For areas of the country where smaller loans are more common (e.g. a $60,000 mortgage), compensation for the lender is limited to a maximum of 3% for points and fees under these new guidelines. Many lenders will just not lend on smaller mortgages in order to avoid not being paid enough monies to cover their overhead expenses.

NAR decided to test some the concerns the real estate industry has with the new guidelines. To that end, they surveyed a sample of lenders to find out how much of an impact the QM changes are having on mortgage costs and access to credit for consumers.

Here are some interesting findings from the survey's respondents:

  • 55% said the QM rule would impact a range of their mortgage originations with 20% being the high end of their estimate.
  • 60% indicated they're most concerned about the impact of the 3% cap on points and fees.
  • 45% said they would not originate non-QM mortgages, while a majority said "they would defer to the investors' guidelines"  on how to treat such loans.
  • Almost 20% said they did not know whether or not they would charge non-QM borrowers higher rates. However, the most frequently cited change for prime and near-prime mortgage borrowers was a rise of 50 to 75 basis points. For subprime borrowers, a rise of 150 basis points was the most often cited change.

The bottom line to all this is just "more problems"  for the mortgage lending industry and "more headaches"  for borrowers applying for a home loan.

And so, the beat goes on as usual.

Benjamin Dona is the Broker and Owner of Gulf Coast Associates, Realtors in Bonita Springs, Florida. He holds two advanced degrees, an MBA and an MA, and has an extensive background in both business and marketing. In 1998, he founded Gulf Coast Associates, and formed a group of like-minded Realtor® associates dedicated to offering professional real estate services by concentrating on information, education and the use of leading edge technologies. He also is a recognized expert on the "Net," a much-quoted and read blog author, and a contributor to both national and international news outlets. Benjamin is a member of the National Association of Realtors, the Florida Association of Realtors, and numerous local real estate boards throughout Southwest Florida.

Contact Benjamin Dona at 239-948-3955

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