Qualified Mortgage (QM) rules went into effect January 2014. A Qualified mortgage is a loan that has substantially equal monthly payments, has no interest-only, balloon payment or negative amortization features and (if it has an adjustable rate) uses the highest possible rate for the first 5 years when qualifying. Lenders must also establish a borrower’s Ability to Repay using documented income and assets and abide by certain fee limitations. Finally, QM rules call for a maximum ratio of a borrower’s monthly debt payments to income of 43%.

To a large extent, these rules are a solution to a problem that no longer exists. The risky lending QM is intended to curb? Banks stopped making most of those types of loans in 2008. The vast majority of loans funded before QM rules kicked in already met QM rules. And, until January 2021 (or until Fannie or Freddie come out of receivership), Temporary QM rules exempt loans that are sold to Fannie Mae or Freddie Mac, insured by FHA or guaranteed by the VA or the USDA from the 43% DTI rule.

And, for those loans that don’t meet the debt-to-income (DTI) ratio limit, there is an exception, called Temporary QM. Running for 7 years or until Fannie or Freddie come out of receivership, Temporary QM exempts loans that are sold to Fannie Mae or Freddie Mac, insured by FHA or guaranteed by the VA or the USDA (which happens to be the majority of loans) from the 43% DTI rule.

The only time you’ll hear us talk about the QM rules will be if you are doing one of a few inherently higher-cost loans. If you want to pay up-front for mortgage insurance, buy a condo, a 2-4 unit property or a rental or if you have lower credit scores, Fannie Mae and Freddie Mac charge risked-based fees that can wind up exceeding QM limits.

It is worth noting that lenders can choose to make loans that don’t meet QM standards, but are at greater legal risk when doing so. As of this writing, it remains to be seen how many lenders will chose to offer non-QM loans.