What Qualified Residential Mortgage Is and How It Works
A qualified residential mortgage is a type of home loan characterized by its comparably stable features. These features are designed to facilitate the home-seeker’s chances of affording the loan and paying it off in full across posterity. The party lending the money is required to make a sincere effort to gauge whether the home-seeker is able to repay the mortgage before taking out the loan. This rule is referred to as the ability-to-repay rule.
Qualified Residential Mortgage Requirements
The logic in requiring somewhat strict requirements for a qualified residential mortgage is that millions of homeowners were burned by the sub-prime mortgage fiasco in the mid-to-late aughts. The risky loan features inherent to sub-prime mortgages are not allowed with qualified residential mortgages. As an example, this type of home loan does not permit borrowers to make balloon payments. Balloon payments are those exorbitantly large payments made toward the back end of the home loan term. Balloon payments are permitted under specific conditions for loans provided by small lenders yet they are not characteristic of qualified residential mortgages.
Qualified residential mortgages do not permit negative amortization as it has the potential to dramatically increase the home loan principal as time progresses even though the borrow makes the required payments. Even the interest-only period in which the borrower pays strictly the interest is disallowed. The logic in forcing borrowers to pay down the actual home loan balance is that those who merely pay the loan’s interest often end up defaulting on the loan or missing payments.
Why Qualified Residential Mortgages are Gaining Popularity
A qualified residential mortgage loan term does not extend beyond 30 years. Furthermore, there is a limit to the portion of income that can be attributed to the borrower’s total debt including the home mortgage. If you do not meet the threshold for the debt-to-income ratio, you will not be eligible for a qualified residential mortgage. Borrowers rave about the fact that qualified home mortgages do not require exorbitant upfront fees or points. Secure this type of home mortgage and the points and fees charged by the lender will be capped at a specific amount. Such limits hinge on the size of the loan. However, some charges are not included in the limit.
Qualified Residential Mortgages Protect the Lender
If it is determined your debt-to-income ratio is sufficient to qualify for this type of home loan, the lending party will enjoy some important legal protections of note. The lender will not be able to extend such a loan unless the borrower proves he or she can repay it. Though qualified residential mortgage lenders are provided with ample protection, it still might be possible to put up a legal challenge if you believe the lender did not perform its due diligence to ensure you had the financial ability to repay the mortgage in full and on time.
Qualified Residential Mortgages and the Dodd-Frank Act
The Dodd-Frank Act mandates home loan lenders bear 5 percent of the credit risk. However, if the loan in question is a qualified residential mortgage, it is exempt from this rule. It is interesting to note half a dozen federal regulators have suggested a new rule that might soon define this type of home loan as one that requires a minimum of a 20 percent down payment. It is certainly possible the credit standards for a qualified residential mortgage will tighten at some point in the future.