2014 Mortgage Rules - QM (Qulaified Mortgages)

Posted by David Kanne on Friday, January 24th, 2014 at 6:11pm.

Big changes are sweeping through the mortgage market this year. The new rules, created by the Consumer Financial Protection Bureau (CFPB) as mandated under the Dodd-Frank Act, ban some of the lending practices that contributed to the housing boom and bust.

As of January 10, there is a new class of mortgages called "Qualified Mortgages" or "QMs". Borrowers who qualify for these loans are presumed to be able to repay the loan for many years, not just during the first few months when an initial "teaser" rate can keep monthly payments low. Additionally, many previously popular loans are banned. Those include interest-only loans; negatively amortizing loans, which can allow your loan principal to increase over time, even though you're making payments; and balloon loans, which have larger-than-usual payments at the end of the term. The new rules also prohibit loans that are longer than 30 years and limit excess upfront points and fees, depending on the size of your loan. For example, a loan over $100,000 can't be a QM if it has points and fees that are more than 3 percent of the loan amount.
Any lender who wants to underwrite a Qualified Mortgage will have to determine a borrower's ability to repay a loan by considering factors like the borrower's income, assets, debts, and credit history. Another feature of a QM is a limit on how much of income can go towards the mortgage- the debt can't exceed 43 percent of monthly income. Additionally, to be considered a Qualified Mortgage, the loan must qualify for purchase or guarantee by Fannie, Freddie or by a federal housing agency; or the lender must keep the loan in its portfolio for a period of time.

Mike Raimi, President of PMAC Lending Services, says that QM should benefit consumers in some respects, though it may make it more difficult to secure financing for others, especially jumbo borrowers (those who borrow more than $417,000 in most markets and up to $625,500 in higher priced markets). Although the new rules may become the norm, Raimi reminds consumers that "Fannie Mae and Freddie Mac will still accept non-QM loans, which are often approved for borrowers with up to 55 percent debt-to-income ratio."

What do you need to know about attaining a mortgage now? According to Raimi, "The process has improved, but it is still labor intensive." Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer - "anywhere from 30 to 60 days."

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by approximately a quarter of a percent. If your credit score is below 620, it's tough to get a loan closed, unless you qualify for the government's HARP plan or are working with FHA. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

Whether you are trying to refinance or buy a home with a mortgage, here is what you will need:

W-2 (2 years)

Tax Returns (2 years)

Pay Stubs (2 months)

Bank statements -- all pages (2 months): You may be required to provide an explanation for large deposits. This has more to do with anti-money laundering efforts than the mortgage process itself.

Up to six months of mortgage payments in cash reserves.

Investment accounts, if bank accounts do not show adequate assets.

Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.

Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can "add-back" tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack -- the numbers on the return are set in stone.

Two more items that you are likely to need: patience and perseverance!

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