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Financial
Feb 15, 2014

The Impact Of Qualified Mortgage Requirements

Sponsored Content provided by Patrick Stoy - Mortgage Consultant/Owner, Market Consulting Mortgage

Given the fact that the new Qualified Mortgage (QM) legislation (which became active on January 10, 2014) is going to have a significant impact on home sellers, home buyers, realtors and mortgage professionals, I’m a little surprised by how many people seem to be unaware of it. So, I thought it would be a good idea to create some QM awareness by explaining what it is and describing how it can impact various individuals and groups in our local area.

How did QM come about?

Following the financial crisis of 2008, Congress passed the Dodd-Frank Act, legislation aimed at preventing similar crises in the future. Dodd-Frank mandated that lenders must do their due diligence to verify each borrower’s capacity to repay his or her mortgage. However, many lenders paid more attention to the value of the house, and an assumed increase in value, in their qualification assessment than they did to the borrower’s actual ability to repay the loan. Of course, this formula doesn’t work when the borrower can’t afford the mortgage and house values fall, which is what happened during the crisis.

One provision in the Dodd-Frank Act was the establishment of the Consumer Financial Protection Bureau (CFPB). One of the CFPB’s main goals was to protect borrowers by establishing regulations and more stringent financial product qualification requirements that were directly linked to the borrower’s ability to pay the loan. Recently, in order to help protect mortgage buyers from ending up with a mortgage they can’t afford, the CFPB introduced the Qualified Mortgage (QM).

What is a QM?

A Qualified Mortgage is a mortgage given to a borrower that meets the new, more constrictive QM criteria. The ability of the borrower to meet the criteria is a strong indication of the borrower’s ability to repay the loan. Here are some of the specific QM guidelines:
 

• As a part of the new, stricter compliance regulations for QM, lenders must analyze at least eight underwriting factors (including income and assets) to determine whether borrowers can afford the mortgage

• The calculations must be based on the average monthly payment throughout the life of the loan

• The maximum amount of points and fees a lender can charge in a QM is 3 percent of total loan amount

• The borrower’s total debt-to-income ratio has been reduced to 43% percent or less

• Borrowers with $2,500 of expendable income leftover each month after monthly expenses have been accounted for are not required to have reserve liquid funds

• Borrower’s with less than $2,500 of expendable income leftover each month after monthly expenses have been accounted for must have the equivalent of 3 months income as liquid reserves

The QM effect

So, what will be the impact of the new QM regulations?
 
• People will be forced to save money before buying a home

• The variety of mortgage products available will be greatly reduced

• Borrowers will probably have to provide more financial information and do more paperwork to obtain a mortgage

• Marginal buyers are less likely to qualify for a mortgage

• Realtors and mortgage lenders will need to educate themselves and adjust to the new guidelines—the guidelines from a year ago are no longer valid

• Pre-qualification and pre-approval will take on a new, higher level of importance

IMPORTANT: Before you list your house for sale or enter any purchase contract, I highly recommend that you contact a reliable mortgage professional and handle the pre-approval process first.

Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.

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