If you’re looking to buy a home in 2014, you’ve probably read or heard about something called a Qualified Mortgage. Here’s what you need to know about Qualified Mortgages, which are sometimes called just QMs.
Qualified Mortgages are based on some common-sense ideas:
- The borrower should be able to repay the loan.
- The terms of the loan should be safer for borrowers.
- The loan should also be easier to understand. That means you won’t see QMs with complicated and risky features such as negative amortization or interest-only periods.
To get a standard Qualified Mortgage, your monthly debt-to-income ratio generally must be at or below 43 percent. This means that no more than 43 percent of your gross monthly income is needed to pay your fixed debts including your mortgage and other debts such as car loans. Generally, financial planners recommend that borrowers keep their debt payments much lower than 43 percent of their income.
Your lender has to evaluate your ability to repay the loan, but just because the lender is willing to loan you a certain amount, doesn’t mean it is right for you. You still have to decide if the proposed loan payment fits comfortably in your budget and allows you to achieve your other goals.
Another protection of a Qualified Mortgage is a limit on up-front fees. In the years before the housing crisis, some lenders charged borrowers very high loan origination fees. A QM limits the points and fees a lender can charge to no more than 3 percent of a loan over $100,000. The limits are somewhat higher for loan amounts under $100,000.
Not every loan has to be a standard QM. Borrowers should still have other loan options, such as jumbo and balloon loans or loans that allow a higher debt-to-income ratio. But even when a loan is not a Qualified Mortgage, lenders must still evaluate your income, debts, and other financial information to make sure you have the ability to repay.
Got more questions about mortgages? You can find answers on Ask CFPB.