How will Qualified Mortgage (QM) rules affect FHA or VA Loans?... by Laura Borja, San Diego Home Loans
As many of you know, the anticipated and somewhat dreaded Qualified Mortgage Rules have now arrived
FHA and VA loans will not be affected by the new QM rules which dictate not just the maximum debt to income ratios for qualification but also the amount of fees paid on a loan.
The idea behind the QM rules is eliminate the No-Doc or Low-Doc loan by forcing lenders to verify income and assets in order to determine the qualification of that applicant.
I don't know about you, but I do not know of a single lender (other than hard money lenders) that are offering or have offered those types of loans in the last few years. This may be once again, an example of a regulation that had good intentions but is being put into place too late. Where were they in 2005?
The new QM rules which became effective on January 10, 2014 aim to reduce default and foreclosure risk by tightening and standardizing mortgage qualification guidelines on Conventional loans.
The basics of the QM rules are
- The total debt to income ratio target is 43% with higher percentages possible with compensating factors and an automated underwriting approval. I anticipate that underwriters will become for conservative in their income calculation particularly if a borrower is sitting near that max threshold.
- Loan terms will be restricted to a maximum of 30 years (bye bye 40 year loan). In addition, interest only loans, loans with balloon payments and negative amortization loans will no longer be compliant.
- There will be a cap of 3% placed on fees and charges. However, not all charges will be included in the calculation and there are different limits for loans under $100,000
Fortunately, HUD and the Veteran's Administration will not be implementing the QM rules as part of their guidelines. As they stated HUD stated in their press release, their guidelines already require lenders to verify income and assets. In addition, interest only loans, balloon payments, negative amortization or loans with terms longer than 30 years have never been offered with VA or FHA loans.
Buyers with lower credit scores, higher debt to income ratios and limited assets may still qualify for FHA and VA loans as long as they meet the specific criteria and eligibility requirements for that loan.
Knowing that our FHA and VA client base would not be affected by the QM rules was a welcome bit of news. Particularly since San Diego County had already been hit with restrictions on FHA and VA loans when the new loan limits for 2014 were announced.