The U.S. Department of Housing and Urban Development released its final ruling on the definition of “Qualified Mortgage,” which includes new requirements that mortgages must meet starting Jan. 10, 2014, in order to be insured, guaranteed, or administered by HUD or the Federal Housing Administration.
HUD’s rule is similar to the existing qualified mortgage rule that was issued by the Consumer Financial Protection Bureau earlier this year.
According to HUD’s rule, “qualified mortgage” loans will have to meet the following criteria in the new year:
- Require periodic payments without risky features;
- Have terms that do not exceed 30 years;
- Limit upfront points and fees to no more than 3 percent with adjustments to facilitate smaller loans (there are a few exceptions, such as for manufactured housing);
- Be insured or guaranteed by FHA or HUD.
HUD says the first two elements of the rule — periodic payments without risky features and terms that don’t exceed 30 years — are already part of its current underwriting processes. The requirement that limits upfront points and fees is not, but it’s consistent with private-sector and conventional mortgages guaranteed by Fannie Mae and Freddie Mac, HUD notes.
HUD’s rule also establishes two types of qualified mortgages: Rebuttable Presumption QM and Safe Harbor QM. The Rebuttable Presumption QM will contain annual percentage rates that are greater than the rate for the average borrower receiving a conventional mortgage. The Safe Harbor QM, which offers lenders the greatest legal certainty, will have a smaller APR. Both types of qualified mortgages hold different protections for consumers and consequences for lenders.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires HUD to have a “qualified mortgage” definition that meets the ability-to-repay criteria, requiring borrowers to have the finances to be able to one day repay the loan.
The qualified mortgage rule will have a major effect on determining the underwriting standards that most lenders will use to qualify borrowers, the National Association of REALTORS® has said. NAR has actively worked with lawmakers in shaping the qualified mortgage rule issued by the Consumer Financial Protection Bureau. Read a full summary of the issues that NAR views as a concern.