There has been a lot of news coverage lately on Qualified Mortgages now that the rule has taken hold in the mortgage industry. What is a Qualified Mortgage and how does it impact the mortgage industry?
It is a great question and one that has been hotly debated as of late. Instead of getting into all of the minutia, let’s peer through the matrix and simplify the term Qualified Mortgage.
In short, a Qualified Mortgage is a mortgage that does not have excessive upfront points and fees, no “toxic” loan features (such as interest only, negative amortization, prepayment penalties, and balloon payments), and a capped debt to income ratio of 43%.
What does that mean? Let’s look at each part:
1. There is now a cap on all lender fees to keep customers from being charged with excessive fees.
2. Over the past several years, negative amortization loans, prepayment penalties, and balloon payments have essentially disappeared from the mortgage industry. Interest only loans did exist, but a buyer needs at least a 30% down payment in order to use an interest only product. In other words, these “toxic” loan features are, for now, already out of the mortgage industry.
3. While the debt to income ratio cannot exceed 43%, there is a temporary exception in place until January 2021 for all loans that are eligible to be sold to Fannie Mae, Freddie Mac, FHA and VA. If the loan being used to buy a home is eligible to be sold to Fannie Mae, Freddie Mac, FHA or the VA, then the debt to income ratio can exceed 43% just as it was allowed prior to Qualified Mortgage rule taking over the mortgage industry. Given the amount of changes in the mortgage industry over the past few years, a 7 year exception might as well be a 700 year exception. By the time 2021 rolls around, odds are there will be another set of rules that has replaced or modified the Qualified Mortgage rule.
How does this impact those looking to buy a home? In all honesty, it really doesn’t. The part most people are concerned about is the cap of 43% on the debt to income ratio, but doesn’t come in to play unless the loan isn’t eligible to be sold to Fannie Mae, Freddie Mac, FHA or the VA. Considering there are VERY few loans available that are not eligible to be sold to these institutions, the 43% cap on the debt to income ratio won’t impact many home buyers in the near future.
When you are out looking to buy a home this year, don’t worry about any of the “the end is near” stories you are hearing about Qualified Mortgages preventing you from buying a home. Work with a professional who is up to speed on the changes and can guide you through the loan process into your new home. If you are buying a home in the state of Georgia, contact me. I can help you get prequalified and start the home buying process today.
