Qualified Mortgages and What you Need to Know to Protect yourself

Qualified Mortgages will be taking effect next month and there is some good news and some bad news. The bad news isn’t so bad, but we want you to be prepared.

If you’re like me, you want the bad news first so you can rip it off like a band aide and get it over with.

The nitty gritty

The good and bad news is that your credit rating will now play a bigger role. Buyers or refinances who have a good credit rating and stable income should have no problem, but buyers or refinancers who have a bad credit rating and not so stable income should start thinking about building up their credit score and investing in a more solid financial situation.

You will still be able to get nonqualified mortgages, but it can be much harder.

However, the future doesn’t look so bleak for both ends of the income spectrum

According to The New York Times, “For a borrower going in January to get a loan, I think it’s going to be pretty much status quo,” said Eric Stein, a senior vice president of the Center for Responsible Lending. “The kind of loans that people are getting these days qualify directly for qualified mortgage status, so there shouldn’t be any impact.”

Also according to The New York Times, the definition of Q.M. is diverse enough that an estimated 95 percent of mortgage loans being made in the current market fit the criteria, according to Richard Cordray, the director of the Consumer Financial Protection Bureau, which is writing the rules.

Lenders must also now document the borrower’s ability to repay the loan. They must also confirm that the borrower has a debt-to-income ratio of no more than 43 percent. This ratio represents the percentage of a borrower’s monthly gross income used to pay off their monthly debts.

Loans with a ratio exceeding 43 percent, but still qualify for purchase by Fannie Mae, Freddie Mac or a Federal Housing Administration guarantee, will still fall under the Q.M. bubble due to a temporary exemption expected to last a few years.

Also keep in mind that higher-risk mortgages like interest-only and “no-doc” loans for example, which do not require verification of a borrower’s income and assets, do not qualify.

The new qualified mortgage rule could also affect the ability to get jumbo-loans. They would not be considered qualified mortgages if the borrower’s debt to income ratio exceeds 43 percent.

But like everything, the question still remains: how will qualified mortgages actually stack up in the New Year?

We will just have to wait and find out.