What’s a ‘Qualified Mortgage’ and Why is it so Important?

July 1, 2014
Last updated:
January 26, 2022
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Are you shopping for a home or a new mortgage? If you are interested in finding the best possible financial product, it is important to consider the benefits of selecting a Qualified Mortgage. With so many different types of loan products to choose from and financial terms to learn, schooling yourself on the mortgage market before you buy your first home or apply for your first refinance mortgage may seem like a daunting task.

Luckily, there are resources that are designed to help you learn the basics of products and terms so that all consumers have the power to inform themselves before securing a loan.

What is a Qualified Mortgage?

There are many different categories of home loans that individual loan products can fall into, and one of these categories is simply referred to as a Qualified Mortgage. Qualified Mortgages, also referred to as the QM in the industry, is a product that has been approved as a qualified product because it has stable features that benefit you as a borrower.

All lenders who are interested in offering a Qualified Mortgage must make a good-faith effort to assess your income and your debt-to-income ratio to ensure that you are able to repay the loan before you take the loan out. All lenders must meet a long list of certain requirements that are free of harmful features that could affect a borrower’s ability to pay.

What’s A Non-Qualified Mortgage?

On the other hand, a non-qualified mortgage (non-QM loan) does not adhere to the Dodd-Frank Act’s consumer protection provisions. Loan applicants whose incomes vary from month to month or those with other unique circumstances may qualify for these types of mortgages.

Alternatively, a lender may decide to offer you a non-qualified mortgage. If a lender offers you a non-qualified mortgage, it does not mean they are not required to verify or assess your ability to repay. Rather, it means that you do not meet the specific criteria needed for a QM.

Commonly, the three main reasons borrowers seek out a non-qualified mortgage are limited documentation, DTI of greater than 43 percent, or interest-only loans. Note, interest rates on loans will vary from lender to lender, but you may find that a non-qualified mortgage will normally have a higher interest rate.

Thus, not only are there differences in how you qualify for a qualified mortgage and a non-qualified mortgage, but there are also differences in the loan itself.

For starters, with QM, the Dodd-Frank act offers lenders protection from legal challenges in foreclosure proceedings and other litigation. A prime example is in the event of a lawsuit that claims a lender did not verify a borrower’s ability to repay. If the borrower has a QM, then the lender has already shown that they have confirmed the borrower’s ability to repay your loan. Of course, a borrower that does not feel the lender made sure they had the ability to repay can still challenge the lender in court.

What’s more, only QMs can be insured, guaranteed, or backed by FHA, VA, Fannie Mae, or Freddie Mac, so they are safer for investors who buy mortgage-backed investments.

That said, in general, non-QM loans offer flexibility for lenders to provide mortgages to people who do not fit the criteria of QM loans.

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Common Requirements of Qualified Mortgages

As briefly mentioned, the main purpose of a qualified mortgage is to protect borrowers from forms of predatory lending. The standards that the loan must meet are set by the Federal government. In addition to assessing the borrower’s ability to pay before approving an application, lenders must meet loan product requirements that are very specific in nature.

Some of the harmful features that a QM product is not permitted to have include:

  • Negative Amortization: This feature affects consumers by allowing the principal to increase over time.
  • Interest-only Periods: Where payments are only applied to interest on the money borrowed.
  • Balloon payment requirement: A requirement where borrowers must pay a large payment at the end of the loan term.
  • Long Terms: Loans cannot have terms longer than 30 years.
  • A Large Debt-to-Income Ratio: There is a limit on how much income that can go to monthly debt payments. This limit is 43% for a QM.

How Can a QM Benefit a New Home Buyer?

As you can see, there are safeguards built into a Qualified Mortgage that are designed to protect you from entering into a long-term binding loan contract that puts you in an unfair position. There are also legal protections that are designed to protect lenders who are committed to designing qualified mortgage products. You can sign a loan that you can afford to repay, have payments applied to your principal as well as interest, and become a homeowner without unnecessary stress. If you are interested in learning more, contact your local mortgage professional to review interest rates and loan terms.

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Ready to Apply For a Mortgage in WA, OR, CO, or ID?

Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.

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