Qualified Mortgage: Definition, Rules, and What Borrowers Should Know

Key takeaways
* A qualified mortgage (QM) meets standards established after the 2007–2008 mortgage crisis to ensure borrowers can afford loans and to limit risky lending practices.
* QM rules are rooted in the Dodd‑Frank Act and aim to protect both borrowers and lenders; loans that meet QM requirements provide lenders with stronger legal protections.
* QM status depends on verified borrower ability to repay, loan features, and limits on fees and pricing.

What is a qualified mortgage?
A qualified mortgage is a home loan that satisfies regulatory standards designed to reduce risky lending and protect both borrowers and the financial system. QM rules require lenders to verify a borrower’s income, assets, and debts and to use those figures to determine the borrower’s ability to repay the loan.

Core QM requirements
* Ability-to-repay (ATR) analysis based on verified income, assets, and debts.
* Debt-to-income (DTI) guideline: generally, monthly debt payments should not exceed 43% of pre-tax income (exceptions may apply).
* Limits on upfront points and origination fees (typically capped at 3% for larger loans).
* Prohibition of risky loan features such as negative amortization, interest-only periods, and balloon payments for most QMs.
* Restriction on certain loan terms and pricing that would make the loan “risky” or overpriced.

How QM protections work
* “Safe-harbor” and rebuttable presumption: QMs provide legal protections for lenders. Depending on the QM type, lenders may receive a safe-harbor from borrower claims that they were given a loan they could not repay, or face a rebuttable presumption that the loan met ATR requirements.
* Secondary market benefits: QMs are more attractive to investors and government-sponsored enterprises (like Fannie Mae and Freddie Mac), making it easier for lenders to sell loans and replenish capital for new lending.
* Limits on selling non‑QM loans: Loans that don’t meet QM standards face restrictions on sale into the secondary market and offer fewer legal protections to lenders.

Special considerations and exceptions
* Small-loan exception: For loans under $100,000, points and origination fees may exceed the 3% cap so lenders can be adequately compensated.
* Non‑QM lending: Lenders may still make non‑QM loans, but these loans can be riskier, may carry higher costs, have more stringent resale limits, and provide less legal protection to the lender.
* Fannie Mae/Freddie Mac pricing: Loan-level price adjustments (LLPAs) and upfront fees can affect the cost of a QM when sold to GSEs. Recent changes have adjusted fees based on credit score and down payment size, affecting borrower costs.

Characteristics of a qualified mortgage
* Verified income and assets before approval.
* No interest-only features, negative amortization, or balloon payments (with specific limited exceptions).
* Reasonable upfront fees and points.
* Loan terms structured to make repayment reasonably predictable and sustainable.

QM vs. non‑QM mortgages (difference in practice)
* QM mortgages follow strict underwriting and feature limits; non‑QM loans do not and may be riskier for borrowers.
* Non‑QM loans may allow alternative documentation, higher fees, or features that increase short‑term affordability but raise long‑term default risk.
* Lenders holding QMs gain stronger legal protections and easier access to secondary-market buyers.

What is prohibited in a qualified mortgage?
* Negative amortization (where the loan balance can increase).
* Interest-only payment periods that defer principal repayment.
* Excessive balloon payments, except in specific small-lender or rural/temporary exceptions.
* Excessive upfront fees beyond regulated caps for most loan sizes.

Bottom line
Qualified mortgage rules were created to make mortgage lending safer and more sustainable after the subprime crisis. They require lenders to verify borrowers’ ability to repay, limit risky loan features and fees, and provide legal and market incentives for higher-quality lending. Borrowers benefit from clearer standards and protections, while lenders benefit from reduced litigation risk and improved secondary-marketability of loans.

Sources
* Dodd‑Frank Wall Street Reform and Consumer Protection Act (relevant provisions)
* Consumer Financial Protection Bureau: guidance on Qualified Mortgages and Ability‑to‑Repay rule
* Fannie Mae: Loan‑Level Price Adjustments (LLPA) and pricing guidance