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Effective Jan. 10th 2014 - the new federal rule of Ability to Re-pay (ATR) and Qualified Mortgage (QM) threw another twist to mortgage lending. Borrowers need to pass QM test in order to obtain home loans backed by Fannie and Freddie. QM is further divided into General QM and Agency QM. The tests are so stringent that experts predict one in five borrowers will be ineligible due to QM test. 

• The QM rule states that a borrower’s total debt liability – including housing debt – should not exceed 43% of the borrower’s income (with some wiggle room). Mortgages that meet the QM rule come with some protections for the lender under the Consumer Financial Protection Bureau’s (CFPB) “Ability to Repay” regulations.
• Total broker and lender fees are capped at 3% or less of the amount financed on a loan $100,000 or greater.  The following fees are part of QM fees:

1. Loan origination fee paid to broker by lender/borrower.
2. Upfront Mortgage Insurance above 1.75% paid by borrower.
3. Processing fee to broker paid by lender/borrower.
4. Underwriting fee paid to lender by borrower.
5. Wire transfer fee to lender paid by borrower.
6. MERS registration fee to lender paid by borrower.
7. Loan Discount points above 1% paid to lender by borrower.

Under Agency QM - loans may still be originated with Automated Underwriting System (AUS) approved status even though it may fail the DTI test. Interest only and loans greater than 30 years are not eligible under the QM rule.

Ability-To-Repay (ATR) - It means that lenders have to look at more documents proving a borrower's income, assets, credit history, monthly expenses and employment situation (like we haven't already). The idea is to keep homebuyers out of mortgages that they can't afford.