What Are QM-Qualified Mortgages Versus Non-QM Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss QM-Qualified Mortgages versus non-QM loans. We will explain what QM-qualified mortgages are and when they went into effect. QM-qualified mortgages focus on the borrower’s ability to repay. QM-Qualified Mortgages took effect on January 10, 2014. In essence, QM-Qualified Mortgages is trying to create a standard mortgage guideline under the guise of protecting consumers.

What Is The Purpose of QM-Qualified Mortgage?

QM-Qualified Mortgages is really meant to protect the agencies, GSEs or Fannie Mae and Freddie Mac. Those loans insured by the Federal Housing Administration ( FHA ). Department of Veteran Affairs (VA). USDA from frivolous litigation such as class action lawsuits, and actions brought against by individual states attorney needing publicity. While some of the litigation has its merit and real damage has been done to the public, most such legal actions are self-serving either aimed at advancing political or financial interests. In the following sections, we will explain what QM-Qualified Mortgage is. We will compare QM-Qualified Mortgages versus non-QM loans.

Understanding QM-Qualified Mortgages

Ultimately the QM-Qualified Mortgages policy is good in that lenders are going to have to be afforded some protection. What the abundance of frivolous litigation caused is lenders and banks to tighten up to a point of virtually no lending at all. This basically impeded the housing recovery after the mortgage meltdown for years.

Qualifying Under QM-Qualified Mortgages
 Qualifying Under Qualified Mortgages

In order to be QM-QualIfied Mortgages, the borrower’s total debt ratio inclusive of a proposed mortgage must be under 43% of their total gross income. However, if Fannie Mae’s or Freddie Mac’s automated underwriting system(s) DU/DO or LP approve a borrower this debt ratio calculation can be thrown out the window. Mortgage loan borrowers can be approved with debt-to-income ratios well into 50% or more of their total combined income.

What Are Safe Harbor QM-Qualified Mortgages?

A loan would also be a QM Safe Harbor loan if the loan is manually underwritten and meets the GSE’s underwriting standards or FANNIE, FREDDIE,  or FHA, VA, and USDA insurance requirements. Fannie, Freddie, FHA, VA, and USDA do not have to come up with their actual QM requirements or standards until January 10, 2021, as long as they are under the thumb of the FHFA or whichever occurs first.

Fannie Mae, Freddie Mac, FHA, VA, USDA QM-Qualified Mortgages

In a nutshell, Fannie, Freddie, FHA, VA, and the USDA can pretty much do whatever they want whenever they want. I guess it’s good. We need liquidity in the market. This gives them the freedom, and a lot of it, to adjust lending parameters as the go. It also affords them as much or more potential to abuse the secondary markets for volume and profit when needed. I am in the lending industry, and where you stand most of the time depends on where you sit. So I guess I am for it.

Guidelines Of QM-Qualified Mortgages

QM Quality Mortgages have certain guidelines that must be followed. We just talked about the debt ratio guideline. It’s pretty loose. The fee restrictions built into QM often hurt more clients than they help. All loan fees associated with a mortgage point and fee calculation must be under 3% of the loan amount. The sounds reasonable when a congressman is looking at it, but in practice it is very cost prohibitive and causes many a lender to overlook loan amounts under $150,000.

In states where attorney pull-down title is even more restrictive the loan closing fee is considered a point and fee calculation. It is often over $1,000 in these states in that the attorney is paid from 70-80% of this fee, plus another 70-80% of the title fees as an agent for faxing in their order, or emailing it to Chicago Title, Fidelity, First American or any other assorted title company. So if a purchase is $100,000 in these states, you start out with one point in title fees.

What Fees Are Included In QM-Qualified Mortgages Points and Fees?

Most lenders have $1200-$1700 in real costs associated with a mortgage. Add another point to point and a half. QM-Qualified Mortgages makes some exceptions for loans under $100,000 but it still makes these loans cost-prohibitive coupled with the fact the same amount of effort is needed for a $300,000 loan as a $110,000 loan. What counts a fee a point calculation is a whole different story.

Income Qualification Under Qualified Mortgages
Income Qualification Under Qualified Mortgages

QM Quality Mortgages also must be full income qualified. This means they can’t be stated income, no doc, equity-only driven, or the “liar loan” you heard on the news. These loans were mostly driven by Credit Scoring. Credit Scoring was used to try and eliminate the actual underwriter and underwriting process so more loans could be funded and securitized on Wall Street as quickly as possible. Credit Scoring although still here, is now less of cancer in that it is used as mainly a parameter for a human to gauge and underwrite files. Of course, it still doesn’t always make sense.

What Are Non-Qualifying Mortgages?

Non-QM Mortgages are nonconforming loans where borrowers who do not meet government and conventional loans can benefit from non-QM loans. Gustan Cho Associates offers one day out of bankruptcy and/or foreclosure with a 30% down payment on non-QM loans. There is no private mortgage insurance and there are no maximum loan limits on non-QM loans. Government and conventional loans have mandatory waiting period requirements after bankruptcy and/or a housing event.

Types of Non-Qualifying Mortgages

Gustan Cho Associates offer Jumbo Non-QM loans with credit scores down to 620 FICO. Non-QM loans are for primary owner-occupant homes, second homes, and investment properties. The 12-month bank statement loan program for self-employed borrowers with no income tax returns required is becoming increasingly popular. The one-year self-employment non-QM loan program is a popular loan program where one-year self-employment is required. If the self-employed borrower has W2 income as well as being self-employed, both incomes can be used.

Exempt Regulations On Non-QM Loans
Exempt Regulations On Non-QM Loans

Under QM many loan types are no longer qualified such as:

  1. Interest-only
  2. 40-year amortization
  3. Balloons or demand features( some exceptions are permitted to 2016)
  4. Negative Amortization
  5. Qualification based on lower initial or teaser interest rates

The list is long, but I am just trying to give you the general mission of the QM Qualified Mortgages. What is considered a small creditor holding and servicing their own mortgage with assets under $2 billion is also QM exempt. $2 billion does not seem so small to me.

Who Benefits From Non-QM Mortgages?

I believe QM has merit. Non-QM mortgages are necessary for mortgage lending continued liquidity and stability in the secondary market. However, I believe the pricing and fee side of it is a mess and screws certain rural, inner-city, and often minority borrower types by making homeownership cost-prohibitive to lenders. This doesn’t just give lenders the excuse to redline. They effectively have to do it to stay in business. I have always believed this segment of the population should be afforded the greatest protection, but QM in many cases is doing just the opposite.

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