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Definition: Qualified Mortgage
Qualified Mortgage is a special features mortgage in which it is mandatory for the lender to analyze the repayment ability of the borrower which is the rule of Ability of Repay (ATR). The qualified mortgages must comply with all the requirements of the qualified mortgage.
The major aim of the Qualified Mortgage is the protection of the lenders who may suffer huge losses in case of major defaults. There are potentially two categories to protect the lenders: Safe Harbor and Rebuttable presumption. Under both categories, there are different rules protecting the lender from the borrowers.
There are 3 types of Qualified Mortgages (QMs):-
1. First category QMs:
a. The Debt to income ratio of the borrower should not exceed 43%. Since the lender has already checked the repayment ability of the borrower using his income, assets and liabilities, the debt to income ratio can be calculated
2. Second category of QMs:
a. These can be the QMs which are approved by some entities like Fannie Mae, Rural Housing service or others. These mortgages have short period and have more features like debt to income ratio can exceed 43%
3. Small Creditor category of QMs:
a. This category of the QM is available to only small creditors
There are various rules governing the Qualified Mortgages which are:
1. Term of the mortgage loan cannot exceed 30 years
2. Periodic payments should be there
3. Fees paid by the borrower should not exceed 3 percent of the total loan amount
4. QMs cannot contain negative amortization, interest only payments or balloon payment features
5. Lender must check the repayment ability of the borrower
There may be various ways for a lender to determine the Ability to Repay (ATR) of the borrower such as Payment history-consistency, credit rating, number of loans etc.
For Example: A mortgage loan meeting all the above said criteria and complying with the above rules will form a qualified mortgage.