Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): General QM Loan Definition | Consumer Financial Protection Bureau (2024)

FAQs

What is a qualified mortgage under reg. Z? ›

With some exceptions, Regulation Z requires lenders to make a reasonable, good faith determination of a consumer's ability to repay any residential mortgage loan. Loans that meet Regulation Z requirements for qualified mortgages (QMs) obtain certain protections from liability.

A Qualified Mortgage is a category of loans that have certain, less risky features that help make it more likely that you'll be able to afford your loan. A lender must make a good-faith effort to determine that you have the ability to repay your mortgage before you take it out.

Qualified Mortgage. A loan where points and fees do NOT exceed 3% of the loan amount. The loan amount is the amount stated in the promissory note.

One category of QMs is the General QM category. For General QMs, the ratio of the consumer's total monthly debt to total monthly income (DTI or DTI ratio) must not exceed 43 percent.

Created to protect people from predatory lending practices, Regulation Z, also known as the Truth in Lending Act, requires that lenders disclose borrowing costs, interest rates and fees upfront and in clear language so consumers can understand all the terms and make informed decisions.

Certain types of loans are not subject to Regulation Z, including federal student loans, loans for business, commercial, agricultural, or organizational use, loans above a certain amount, loans for public utility services, and securities or commodities offered by the Securities and Exchange Commission.

Loans meeting QM criteria are considered compliant with ATR regs "if the annual percentage rate [of the mortgage] does not exceed the average prime offer rate (APOR) for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set." Under this standard, the "loan receives a ...

The General QM Final Rule

Under the amended rule, a loan meets the General QM loan definition only if the annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by less than 2.25 percentage points as of the date the interest rate is set.

Mandatory product feature requirements for all QMs

Points and fees are less than or equal to 3% of the loan amount (for loan amounts less than $100k, higher percentage thresholds are allowed); No risky features like negative amortization, interest-only, or balloon loans (BUT NOTE: Balloon loans originated until Jan.

These parameters require that the borrower has not taken on monthly debt payments in excess of 43% of pre-tax income; that the lender has not charged more than 3% in points and origination fees; and that the loan has not been issued as a risky or overpriced loan with terms such as negative-amortization, balloon payment ...

Which of the following mortgages is not a qualified mortgage? ›

Loans that do not meet the definition of a qualified mortgage are ones that have interest-only or negative amortization payments components, balloon payments, repayment periods longer than 30 years, or “no-doc” loans.

A significant difference between a QM loan and a Non-QM loan is that a Non-QM loan uses alternative methods of income verification (vs. the standard income methods of verification of a QM loan) to help the borrower get approved for a mortgage loan.

There are four types of QMs – General, Temporary, Small Creditor, and Balloon-Payment. Of the four types of QMs, two types – General and Temporary QMs – can be originated by all creditors.

Maximum loan term is less than or equal to 30 years. Any loan that meets the product feature requirements with a debt-to-income ratio of 43% or less is a QM.

Bank statement loans are considered riskier than typical mortgages, and many banks and mortgage lenders don't offer them. That's because they're non-qualified mortgages (non-QM), meaning they aren't backed by Fannie Mae and Freddie Mac, so there's less protection for lenders and borrowers.

In most cases, a qualified mortgage borrower is limited to a 43 percent DTI ratio. In contrast, non-QM loans are not subject to these same rules and regulations. They typically have less stringent requirements for credit scores, debt-to-income ratios and repayment schedules.

Mortgage Qualification Definition

Mortgage qualification is a standard set by a mortgage lender to approve a potential borrower a certain mortgage loan amount.

Loans that do not meet the definition of a qualified mortgage are ones that have interest-only or negative amortization payments components, balloon payments, repayment periods longer than 30 years, or “no-doc” loans.

Maximum loan term is less than or equal to 30 years. Any loan that meets the product feature requirements with a debt-to-income ratio of 43% or less is a QM.