What is a Qualified Mortgage?

Types of qualified loans include all government-backed loans guaranteed or insured by the Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the Department of Veterans Affairs (VA). All other mortgages—including conventional loans backed by Fannie Mae and Freddie Mac—and jumbo loans must meet special requirements to be considered qualified loans.

A lender must make a good-faith effort to determine that you have the ability to repay your mortgage before giving it to you. This is known as the “ability-to-repay” rule. If your loan is a Qualified Mortgage, it means the loan met certain requirements and it’s assumed that the lender followed the ability-to-repay rule.

Generally, the requirements for a Qualified Mortgage include:

• No risky loan features, such as:
  • An “interest-only” period, when you pay only the interest without paying down the principal, which is the amount of money you borrowed.
  • "Negative amortization,” which can allow your loan principal to increase over time, even though you’re making payments.
  • "Balloon payments,” which are larger-than-usual payments at the end of a loan term. The loan term is the length of time over which your loan should be paid back. Note that balloon payments are allowed under certain conditions for loans made by small lenders.
  • Loan terms that are longer than 30 years.
• A limit on the price of your loan. The annual percentage rate, or APR, on most qualified mortgages cannot be higher than a particular threshold. This threshold can depend on the type or size of your loan. This limit does not apply to “seasoned” and “small creditor” qualified mortgages.
• A limit on upfront points and fees. If you get a Qualified Mortgage, there are limits on the amount of certain up-front points and fees your lender can charge. These limits will depend on the size of your 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.
• A requirement to consider and verify income or assets and debts. For your loan to be a Qualified Mortgage, your lender must consider and verify your current monthly income or assets (other than the value of the property that will secure your loan) and your monthly debt. Your lender must also consider either how much of your income can go towards your monthly debt, including your mortgage and all other monthly debt payments (known as your debt-to-income ratio) or how much of your income you will have left over after paying your monthly debt (known as your residual income).