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New QM Rules: What Your Clients Need to Know

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By Margaret Kelly

mortgage_contract_lenderWith the new year fast approaching, there’s an important issue you’ll want to familiarize yourself with so you can answer buyers’ questions: qualified mortgages.

Beginning Jan. 10, under new “qualified mortgage” provisions in the Dodd-Frank Act, lenders will evaluate borrowers on eight underwriting factors to determine their ability to repay their loans. The rules are intended to protect consumers from predatory lending practices and give investors renewed confidence in the mortgage market.

One of the biggest changes in the “qualified residential mortgage” and QM rules stipulates that a borrower’s debt-to-income ratio cannot exceed 43 percent, which relaxes the previous threshold of 36 percent. Regulators may soon bring the QRM more in line with the QM rules to encourage more consistency and clarity in the lending process. That would go a long way in producing a clearer, more industry-friendly process next year.

If the new policies are not practical, they could have a detrimental effect on housing by creating a tighter lending environment, with the potential to stifle some borrowers’ ability to qualify for a loan. In particular, this could limit those applying for jumbo loans, self-employed borrowers and buyers seeking interest-only loans.

Some of us in the industry are concerned about what kind of impact these new rules will have on housing, which has enjoyed a strong rebound this year. The positive trajectory could slow in 2014 after the QM rules kick in.

According to the U.S. Department of Housing and Urban Development, mortgage loans must follow the guidelines below to meet the QM definition:

• Require periodic payments
• Have terms not to exceed 30 years
• Limit up-front points and fees to no more than 3 percent, with adjustments to facilitate smaller loans
• Be insured or guaranteed by FHA or HUD

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