Qualified Mortgage
What Is a Qualified Mortgage?
A qualified mortgage is a mortgage that meets certain requirements for lender protection and secondary market trading under the [Dodd-Frank Wall Street Reform and Consumer Protection Act](/dodd-frank-financial-administrative reform-charge), a critical piece of financial reform legislation passed in 2010.
Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act are expected to safeguard the two borrowers and the financial system from the risky lending practices that contributed to the subprime mortgage crisis of 2007. By making greater incentives for offering higher quality mortgage loans in both the primary and secondary markets, the goal of the Act was to bring down the overall risk that mortgages make in the greater financial system.
How Qualified Mortgages Work
To be eligible for a qualified mortgage, there are certain requirements that borrowers must meet. These requirements depend on an analysis of the borrower's ability to repay their mortgage (as indicated by their income, assets, and debts). These boundaries expect that the borrower has not assumed month to month debt payments in excess of 43% of pre-charge income; that the lender has not charged over 3% in points and origination fees; and that the loan has not been issued as a risky or overrated loan with terms like negative-amortization, balloon payment, or interest-only mortgage.
For lenders who follow certain regulations spread out in the Act, qualified mortgages might furnish them with certain extra legal protections. Under qualified mortgage rules, "safe harbor" provisions safeguard lenders against lawsuits by distressed borrowers who claim they were extended a mortgage the lender had not a great explanation to accept they could repay.
They additionally give incentives to lenders who wish to sell their loans in the secondary market (since qualified mortgage loans are more interesting to underwriters in structured product bargains). Lenders who issue qualified mortgages can all the more effectively resell them in the secondary market to substances like Fannie Mae and Freddie Mac. These two government-sponsored ventures buy most mortgages, which opens up capital for banks to make extra loans.
Qualified mortgage rules were developed to assist with working on the quality of loans issued in the primary market (and that eventually may open up for trading in the secondary market). The majority of recently started mortgages are sold by the lenders into the secondary mortgage market. In the secondary mortgage market, recently started mortgages are packaged into mortgage-backed securities and sold to investors, for example, pension funds, insurance companies, and hedge funds. Only certain qualified mortgages are eligible available to be purchased in the secondary market.
Special Considerations
There are several exceptions to qualified mortgage rules. One exception is that points and origination fees may surpass 3% for loans of under $100,000 (if not, lenders probably won't be adequately compensated for giving such loans, and these more modest mortgages could become inaccessible).
Likewise, qualified mortgage regulations permit lenders to issue mortgages that are not qualified. Nonetheless, there are rules that limit the sale of these loans into the secondary mortgage market and give less legal protections to lenders.
Features
- Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act-which was passed in 2010 and made the rules that manage qualified mortgages-are expected to safeguard the two borrowers and the financial system from the risky mortgage lending practices that contributed to the subprime mortgage crisis of 2007.
- A qualified mortgage is a mortgage that meets certain requirements for lender protection and secondary market trading under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- To be eligible for a qualified mortgage, borrowers must meet certain requirements; these requirements are intended to decide a borrower's ability to repay their mortgage.
