What Is a Qualified Mortgage?

A qualified mortgage is a mortgage that meets certain requirements for lender protection and secondary market trading under the Dod﷽d-Frank Wall🔯 Street Reform and Consumer Protection Act, a significant piece of financial reform legislation passed in 2010.

Provisions of the Dodd-Frank Wall Street Ref꧂orm and Consumer♕ Protection Act are intended to protect both borrowers and the financial system from the risky lending practices that contributed to the subprime mortgage crisis of 2007. By creating more significant incentives for offering higher quality mortgage loans in both the primary and secondary markets, the goal was to lower the overall risk that mortgages create in the greater financial system.

How Qualified Mortgages Work

To be eligible for a qualified mortgage, borrowers must meet certain requirements. These are based on an analysis of the borrower's ability to repay their mortgage (according to their income, assets, and debts). These parameters require that the borrower has not taken on monthly debt payments over 43% of pre-tax income, that the lender has not charged more than 3% in points and origination fees, and that the loan has not been issued as a risky or overpriced loan with terms such as negative-amortization, balloon payment, or 澳洲幸运5官方开奖结果体彩网:interest-only mortgage.

For lenders who follow certain regulations laid out in the Act, qualified mortgages may provide them with additional legal protections. Under qualified mortgage rules, “澳洲幸运5官方开奖结果体彩网:safe harbor” provisions protect lenders against lawsuits by 澳洲幸运5官方开奖结果体彩网:distressed borrowers who claim the lender exten⭕ded a mortgage they had no reason to believe they could repay.

The Act also provides incentives for lenders who wish to sell their loans in the secondary market (since qualified mortgage loans are more appealing to underwriters in structured product deals). Lenders who issue qualified mortgages can more easily resell them to entities such as Fannie Mae and Freddie Mac in the secondary market. These two government-sponsored enterprises buy most mortgages, which frees up capital for banks to make additional loans.

Qualified mortgage rules were developed to help improve the quality of loans issued in the primary market (which may ultimately become available for trading in the secondary market). The majority of newly-originated mortgages are sold by lenders in the secondary mortgage market. In the secondary mortgage market, newly-originated mortgages are packaged into mortgage-backed securities and s൩old to investors, such as pension funds, insurance companies, and hedge funds. Only certain qualified mortgages are eligible for sale in th🦄e secondary market.

Special Considerations

There are several exceptions to qualified mortgage rules. One is that points and origination fees may exceed 3% for loans of less than $100,000. (Otherwise, lenders might not be sufficiently compensated for issuing such loans, and these smaller mortgages might become unavailable.ꩵ)

In addition, qualified mortgage regulations permit lenders to issue 澳洲幸运5官方开奖结果体彩网:mortgages that are not qualified. However, there are rules that limit th💦e sale of these loans into the secondary mortgage market and provide fewer legal protections for lenders.

The Bottom Line

The subprime mortgage crisis of 2007 has left lasting impacts on the housing market and lending practices. The Dodd-Frank Act of 2010 is a great example of regulations put into place to prevent another mortgage crisis. The Act creಌated requirements for qualified mortgages and rജemoved risky practices to make mortgage lending more secure.