What is a qualified mortgage? This is a question that many people are asking these days, as the rules for mortgages have changed. A qualified mortgage is one that meets the standards set by the Consumer Financial Protection Bureau (CFPB). In this blog post, we will explain what a qualified mortgage is, and what you need to know in order to get one.
What Is a Qualified Mortgage Table of Contents
Who Is The Consumer Financial Protection Bureau (CFPB)?
The CFPB is a government agency that was created in 2010 in response to the financial crisis. The agency's mission is to protect consumers from unfair, deceptive, or abusive practices and to ensure that they have access to products and services that meet their needs.
The CFPB is responsible for implementing and enforcing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes the qualified mortgage rule.
The qualified mortgage rule provides certain protections for consumers who take out mortgages.
For example, the rule limits fees that can be charged at closing and prohibits lenders from making loans without considering a borrower's ability to repay.
If you're thinking about taking out a mortgage, it's important to understand what a qualified mortgage is and how it might affect you. Read on to learn more about qualified mortgages and the CFPB's role in protecting consumers.
What Is a Qualified Mortgage?
A qualified mortgage is a type of home loan that meets certain standards set by the CFPB. To be a qualified mortgage, a loan must:
- Have certain limits on fees and points charged at closing
- Be made without considering a borrower's ability to repay
- Meet other requirements set by the CFPB
Qualified mortgages provide certain protections for borrowers, but not all home loans are qualified mortgages. For example, loans that are larger than what's known as the "conforming loan limit" are not qualified mortgages. Loans with terms that are longer than 30 years are also not qualified mortgages.
The CFPB's qualified mortgage rule went into effect on January 2014.
What Does the Qualified Mortgage Rule Do?
The qualified mortgage rule prohibits lenders from making loans without considering a borrower's ability to repay. This is sometimes called the "ability-to-repay" or ATR rule. Under the ATR rule, lenders must make a good-faith effort to determine that borrowers can afford to repay their loans.
To do this, lenders must consider:
- The borrower's current and future income
- The borrower's current debts
- The borrower's employment status
- The borrower's credit history
- The borrower's other financial obligations
- The type of loan being made
- The terms of the loan
- The value of the property being purchased
In addition, the ATR rule prohibits lenders from making what are known as "negative amortization" loans. This is a type of loan where the borrower's monthly payments are not enough to cover all of the interest that accrues on the loan. As a result, the amount of debt owed by the borrower increases over time. Negative amortization loans can be very dangerous for borrowers because they can end up owing much more than they originally borrowed.
The ATR rule also limits fees that can be charged at closing. Under the rule, lenders can only charge certain "pre-paid" fees, such as for appraisal and credit report services. Lenders cannot charge borrowers a fee for simply applying for a loan.
What Are The Four Types of Qualified Mortgages?
There are four types of qualified mortgages: fixed-rate, adjustable-rate, balloon, and interest-only.
Fixed Rate Mortgages
Fixed-rate mortgages have monthly payments that stay the same for the life of the loan. The interest rate will not change over time. Adjustable-rate mortgages have monthly payments that can change over time. The interest rate will usually adjust every year.
Balloon loans have lower monthly payments for a set period of time, usually five to seven years. After that, the borrower must pay off the entire loan in one lump sum.
Interest-only loans only require borrowers to pay the interest on the loan for a set period of time, usually three to five years. After that, the borrower must start paying off both the interest and the principal of the loan.
Is a FHA a Qualified Mortgage?
The answer is maybe. It all depends on when the loan was originated.
If the loan was originated on or after January, 2010, then it generally will be a qualified mortgage.
However, if the loan was originated before January, 2010, then it might not be a qualified mortgage.
It all just depends on each individual case. So if you're wondering whether or not your FHA loan is a qualified mortgage, you'll need to check with your lender to find out for sure.
What Is The Difference Between a Qualified Mortgage and a Non-Qualified Mortgage?
The main difference between a qualified mortgage and a non-qualified mortgage is that a qualified mortgage is insured by the government, while a non-qualified mortgage is not. Qualified mortgages are also known as "government-backed mortgages", because they are backed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA). Non-qualified mortgages, on the other hand, are not backed by any government agency.
There are several other differences between these two types of mortgages, including:
- Must comply with certain regulations set forth by the Consumer Financial Protection Bureau (CFPB)
- Designed to make sure that borrowers can afford the loan
- Cannot have certain risky features, such as negative amortization or interest-only payments
- Cannot have balloon payments
- The loan term must be no more than 30 years
- Not subject to the same regulations as qualified mortgages
- Not required to meet the CFPB's ability-to-repay rules
- Can have riskier features, such as negative amortization or interest-only payments
- Can have balloon payments
- Loan terms can be longer than 30 years
Which type of mortgage is right for you will depend on your individual circumstances. If you are a first time home buyer or have a low credit score, you may want to consider a qualified mortgage. On the other hand, if you have a higher credit score and can afford a higher monthly payment, a non-qualified mortgage may be a better option. You should speak with a loan officer to determine which type of mortgage is right for you.
Can a Qualified Mortgage Have a Balloon Payment?
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established new rules for qualified mortgages. A key provision of this act prohibits lenders from making loans with risky features such as negative amortization, interest-only payments, or balloon payments. So, the answer to the question is no; a qualified mortgage cannot have a balloon payment.