I’ve written in the past about the different types of home loans that are available today. This article is a continuation of that subject. In 2013, we could see a new type of loan hit the market. Technically, it’s a new set of rules that will apply to various types of mortgages. But you need to know about it all the same, if you’re planning to buy a home in 2013.
I am referring, of course, to the so-called qualified mortgage rule that is scheduled to take effect next year. You may have heard this term before. It has been in the news a lot lately. Mitt Romney even mentioned it in one of the presidential debates, during one of his trademark tirades.
The problem is, many people still don’t know what a qualified mortgage is, or how it relates to other types of home loans currently in use. So here’s a quick overview.
Qualified Mortgage: A Rule Mandated by the Dodd-Frank Act
The QM concept was born from the Dodd-Frank Wall Street Reform and Consumer Protection Act. That’s a mouthful, I know. So let’s call it Dodd-Frank for short. This federal law calls for the creation of a qualified mortgage (QM) rule by January 2013.
Among other things, the rule will require lenders to verify a borrower’s ability to repay his or her loan. It also prohibits certain loan features that have been deemed high-risk, such as interest-only payments, negative amortization, etc. In other words, it sets the bar for what can be considered a ‘safe’ home loan.
Lenders who abide by the QM guidelines when making loans will be rewarded with some degree of legal protection. They will have a legal ‘safe harbor’ against certain types of lawsuits. In essence, they will be protected from consumer lawsuits if the loan in question meets all of the QM requirements. Think of it as an incentive to make sensible loans.
All of this is outlined within the Dodd-Frank Act, but only in general terms. The specifics are still being hammered out by various federal agencies. So you can expect to hear a lot more about it between now and January.
It Will Apply to Several Types of Home Loans
The qualified mortgage is not really a new type of home loan. Rather, it’s a new set of rules that will apply to other types of home loans. The QM guidelines will likely apply to all conventional types of mortgages, which means everything other than VA and FHA. Both fixed-rate and adjustable-rate conventional loans will fall under the QM umbrella.
What does this mean for borrowers? From a procedural standpoint, not much. The process of applying for a home loan probably won’t change much. In fact, most lenders are already doing the things that will soon be required by QM.
For instance, most lenders have gotten back to full documentation of income, savings, employment, etc. Things got lax during the housing boom. Borrowers were allowed to simply state their income, with no documentation to back it up. The housing crisis changed all of that. Lenders have become more strict. They have stricter procedures for evaluating borrowers. The qualified mortgage rule will simply mandate something that, for the most part, is already happening.
Of course, we don’t know the full details of the QM rules. They are still be hammered out by the Consumer Financial Protection Bureau (CFPB). But we expect to have them sometime in January 2013.
For now, I only want to put this on your radar. It’s going to affect all types of home loans, with the exception of government-backed loans. So it’s something you should be aware of, if you’re planning to buy a home in 2013.
If you want to learn more about this subject, check out our QM fact sheet.
Standard Choices Still Available in 2013
Aside from the forthcoming qualified mortgage, we do not expect any major changes in the lending world next year.
The FHA loan program will still be available, and will likely remain a popular choice for first-time buyers. The FHA is raising its mortgage insurance premiums again. So these loans could be more costly next year. But aside from that, the program should work the same as it did in 2013.
The two biggest choices for borrowers are (A) government or conventional mortgage, and (B) fixed or adjustable rate. These are the two primary classifications, when it comes to choosing a type of home loan in 2013. Fortunately, we have some in-depth tutorials on these subjects as well: FHA vs. conventional | Fixed vs. adjustable rate
If you choose FHA (or even VA) over a conventional mortgage, the 2013 QM rules shouldn’t apply to you at all. As of right now, those requirements only apply to conventional loans that are not insured by the government.