Qualified Mortgages: How To Get Them

Qualified Mortgages: How To Get Them

Written by Jeanette Arnholt
Article • 12/07/2021 • 12 minute read

Qualified Mortgages: How To Get Them

Taking out a mortgage on your home can feel like a scary, stressful step. The thing is, nearly everyone needs to take out a mortgage loan on their home, and understanding how to get them isn’t nearly as daunting as it may seem.

There are many different mortgage packages, but as a general rule of thumb, you’ll likely want to search for qualified mortgages. Qualified mortgages tend to be less risky and have better features than some of the alternatives.

Let’s talk about everything you need to know about qualified mortgages (QM) as well as how you can get one.

What Is a Qualified Mortgage?

A qualified mortgage is a type of home loan that meets all consumer protection requirements laid out by the Dodd-Frank Act.

With a QM loan, lenders cannot implement loan packages with artificially low introductory monthly rates that sharply increase after that initial period ends.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was implemented after the 2008 financial crisis to protect homebuyers from mortgage offers with risky or unclear terms. This is because the 2008 crisis was largely caused by subprime mortgages that many homeowners failed to pay off.

Lenders need to follow a certain set of rules in order to say that they’re offering a qualified mortgage. Qualified mortgages are unable to have the following:

  • Risky loan features, or those that offer low monthly loan repayments that sharply increase after the introductory period. These include subprime mortgages.
  • Excess upfront costs and fees.
  • A high percentage of a borrowers’ income going towards their debt. For instance, a borrower’s debt to income (DTI) ratio cannot be above 43%, as this helps ensure the borrower will pay off the loan.
  • Loan terms that are longer than 30 years.

Additionally, lenders need to have thoroughly checked your income, employment history, and other factors and make a good faith effort to prove that you’ll be able to pay back the mortgage.

This means they are following the “ability to repay” rule. It outlines the following eight criteria that the lender must use to determine if you can make mortgage payments.

To see if you can pay off your loan, a lender must review the following:

  • Your current employment status
  • The estimated monthly payment on your mortgage
  • Your current assets or income
  • Your current debt obligations, including alimony or child support
  • Your debt to income ratio
  • Your credit score and credit history
  • Any monthly payments on second mortgages
  • Monthly payments on mortgage-related expenses, like property taxes

What Risky Loan Features Are Not Permitted?

Qualified mortgages can’t contain risky loan features. But what exactly does that mean? There are a few specific factors that are not permitted under QM mortgages.

For one, negative amortization is banned. Amortization means that when you pay off a loan with regular payments, the amount you owe goes down each time. With negative amortization, the amount you owe goes up because you’re not paying enough to cover the interest cost.

Also, you cannot add balloon payments to qualified mortgages. These are larger than usual payments that are made at the end of a loan term. Mortgages with balloon payments often have very low monthly payments in the years before the balloon payment is required.

Qualified mortgages also may not have an interest-only period. These are periods in which you are only paying the interest without paying down the principal balance. The principal is the amount of money you borrowed, while interest is a percentage of the principle that the lender collects for profit.

Pros and Cons of Qualified Mortgages

Qualified mortgages are generally preferred over non-QM loans because they have lower interest rates and shorter loan terms. They offer several protections for the borrower, including the ability to repay rule, which can help prevent borrowers from defaulting.

However, they are mainly meant to protect lenders from heavy defaults seen during the housing crisis. This makes the mortgage application process a little more intensive and strict than it once was. It raises the requirements and can bar some people from obtaining a QM mortgage.

What Is a Non-Qualified Mortgage?

Qualified mortgages are preferred, but they are sometimes more difficult to obtain. For that reason, non-qualified mortgages (non-QM loans) may be the only option.

Non-QM loans do not conform to the consumer protections listed in the Dodd-Frank Act. For instance, if you don’t meet the income verification requirements laid out in the Dodd-Frank Act, a lender may not be able to offer you a qualified mortgage. However, they can offer you an alternative.

Lenders will still check your employment history and make sure that you’ll be able to pay back the loan. Non-QM loans just mean that you don’t meet the specific criteria for a qualified mortgage.

Who Can Get Qualified Mortgages?

Chances are, most individuals are going to be successful in qualifying for a qualified mortgage. These are more common than non-QM loans, and they tend to have more desirable loan features.

The requirements for a qualified mortgage are based on a borrower’s ability to repay the loan. They include:

  • DTI of no more than 43%.
  • The lender has not charged more than 3% in origination fees.
  • The loan does not contain risky features.

However, some individuals may not be able to meet the requirements. There are three main reasons why you may need to seek a non-QM loan over a qualified mortgage:
  1. You have limited documentation. This may be because you recently moved to the United States or for other reasons.
  2. Your debt to income ratio is above 43%.
  3. You’re looking to acquire an interest-only loan. These are loans in which you only pay the interest for some or all of the term, and the principal balance remains unchanged.

Legal Protections of Qualified Mortgages

Critics of the Dodd-Frank Act claimed that mortgage lenders were put in an unfair place, as the low-interest rates and highly regulated features of qualified mortgages would make firms less competitive than foreign counterparts.

However, QM loans offer the lender some protections that non-QM loans don’t. For example, lenders that offer QM loans are protected against lawsuits from distressed borrowers who claim that they were given a mortgage that the lender knew they’d be unable to repay from the start.

They also incentivize lenders who wish to sell loans in a secondary market. Lenders who issue qualified mortgages can easily resell a mortgage to institutions such as Fannie Mae or Freddie Mac. These are government-sponsored entities that buy back most mortgages.

What If I Can’t Get a Qualified Mortgage?

If you need to get a non-QM loan for one reason or another, it doesn’t necessarily spell disaster. In fact, they might be able to easily get you the money you need to buy a home if you don’t meet the requirements of a QM loan.

The benefits of a nonqualified mortgage allow individuals with low credit scores or inconsistent forms of income to purchase a home. They also require less documentation, and the application process is nearly identical to qualified mortgages.

However, the interest rates and fees are much higher than QM loans, and they cannot be sold to Fannie Mae or Freddie Mac. Not to mention, it can be a lot more difficult to find a lender who offers these types of loans.

Non-QM loans might be the right option for you if you fall into one of these categories:

  • You’re self-employed.
  • You’re retired.
  • You’re a foreign national.
  • You’re a business owner.
  • You live off of investments.
  • You have a low income but a high amount of assets.
  • Your DTI is high.
  • Your credit score is low.

Non QM Loans vs. Subprime Mortgages

If you’re nervous about non-QM loans because they sound similar to subprime mortgages, it’s important to remember that they are not the same thing. After that, the Great Recession and the housing reform led to the misconception that non-QM loans are bad loans.

While they are not usually preferred over a qualified mortgage, they can open up the doors for more individuals to secure a home loan.

Subprime mortgages are specifically targeted at individuals with poor credit who represent a high risk to lenders. Since poor credit poses the risk that a lender might not profit from your loan, these loans have extremely high interest rates to help cushion the blow if you default.

Subprime mortgages are now highly regulated, as these loans contributed to the housing crisis in 2008. They should be avoided at all costs. Non-QM loans are different and may be a great option in specific circumstances.

Choosing the Right Qualified Mortgage

Understanding what makes a qualified mortgage is only half the battle. It’s also necessary to know what makes a well-qualified mortgage.

For one, make sure you shop around at different lenders for the best rates and loan terms. Just because qualified mortgages have to adhere to several strict guidelines and rules doesn’t mean that they can’t vary from place to place. Don’t be afraid to see the offers and rates that multiple lenders are willing to give to pay as little as possible.

Also, keep in mind that qualified mortgages don’t necessarily equal conventional mortgages. While conventional mortgages tend to have low interest rates, FHA or VA loans can be more accessible for qualifying individuals. Make sure you’re choosing the loan package that matches up with your eligibility.

Additionally, it can help to find a lender that does the entire application in-house under one roof. This reduces the confusion and complexity while also getting you to closing much faster than competitors.

Are you looking for a lender that checks all the boxes and more? Network Capital offers a streamlined application process, competitive rates, convention, FHA, and VA mortgages. Not to mention, we offer $0 lender fee programs that can get you to the home of your dreams for even less. Click here to learn more.

In Conclusion

Qualified mortgages are heavily regulated loans that were introduced following the housing crisis of 2008. A qualified mortgage cannot include risky loan features, and a lender must abide by the ability to repay rule to ensure that the borrower can pay off the loan.

Risky features such as negative amortization, balloon payments, and interest-only loans are barred from being included in QM loans. However, the requirements for obtaining a QM loan are also a bit strict.

If you can’t qualify for a QM loan, a non-QM loan is still a good option. While these tend to have less attractive features and higher interest rates, they can give individuals with little documentation or poor credits access to a home mortgage.

It’s important to shop around to find the best lender for your qualified or non-qualified mortgage. There’s never a reason to pay more than you need to for the home of your dreams. Let us help you get there. Your best life starts with Network Capital.

Dodd-Frank Act | CFTC
The 2008 Housing Crisis | Center for American Progress
What is negative amortization? | Consumer Finance