After the new Qualified Mortgage (QM) standards went into place on January 10th of this year, there has been much commentary around the consumer impacts. Do these changes really impact the average borrower? Outside of a slightly lower debt requirement – No, it really doesn’t. Many of the new QM guidelines eliminate loan features conservative banks would have avoided in the first place: interest only loans, balloon payments and excessive fees. And, while you might have heard otherwise, it does not impact down payment requirements or interest rates.
QM Standards Impact to Lenders
The new standards are more about creating a baseline of less risky lending practices. Most lenders today bundle their loans and transfer/”Sell” them to Fannie Mae/Freddie Mac so they are not carrying the risk of the loans on their own portfolios. In order to do that in the future, they will have to meet the new QM guidelines or keep the loan on their own books. Most conservative lenders will opt to only originate QM qualifying loans, but there will still be some lenders who will offer loans with higher risk. As a consumer, you should understand whether or not the loan product you are approved for meets the new QM standards or not.
Loan Features not available on QM Loans
If you were thinking about a loan that was interest only, had a balloon payment, or payment terms in excess of 30 years-then you will not be in a QM loan product. Personally, I think this is a good thing. These higher risk programs should only be used in rare circumstances, and should not be used for general home ownership purposes. If you, or someone you know, is steered in this direction I encourage you to get second–and third–opinions.
Changes in Debt-to-Income (DTI) Ratios
When applying for a home loan, the lender will take a look at how much debt you have compared to your income. This is known as DTI, and the new guidelines lower the standard from 45% to 43%. In other words, if you take-home $10,000 a month, no more than 43% of what you make should go towards paying your debts, including the new house payment. This amounts to a few hundred dollars a month difference compared to what was allowed previously. If you are running so short on cash that this poses a significant issue, then perhaps it’s time to take a step back and evaluate how much you should really spend on your new home.
For loan programs that meet the QM standards, there will be a limit on how much can be charged in terms of fees. This excludes things like credit report charges, but instead focuses on how much a lender can charge you to do the loan. It’s now capped at 3% for loans at $100k and higher.
Ability to Repay
If you remember the days of being able to get a loan with very little documentation, those days are gone. QM standards raise the industry bar on demonstrating the ability of a client to repay the loan. This means there will be incremental due diligence on the loan provider’s part to test that you can meet the terms of the loan based upon the information you provide. Most banks, like mine, already had these tests in place prior to QM’s implementation.
Who will offer loans outside of QM standards?
This is when I must caution those considering non-QM loan products. As the market adjusts to the new rules, it makes me wonder if we are not creating a new category of higher-risk lenders. If you have a high risk product (e.g., interest only, high DTI) then you will have to pay for the increased risk the lender is taking on you somehow. Again, nothing in life is free so you are paying for it somewhere. I would encourage you to take a hard look at the numbers to make sure you wouldn’t be better served financially in a QM product.
Feel free to call or e-mail me with any QM questions you might have. 214-529-9622