What Are the 4 Types of Qualified Mortgages?

A Qualified Mortgage (QM) is a category of home loans designed to ensure affordability for consumers and offer certain protections for lenders. Its origins trace back to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which introduced the “Ability-to-Repay” (ATR) rule. This rule mandates that lenders make a reasonable, good-faith determination of a borrower’s capacity to repay a mortgage.

Loans meeting QM criteria are presumed to comply with the ATR rule, providing lenders with legal certainty, often called a “safe harbor” or “rebuttable presumption,” against future litigation. This framework encourages responsible lending practices by preventing mortgages with risky features, protecting consumers from unaffordable loans, and stabilizing the housing finance system.

General Qualified Mortgage

The General Qualified Mortgage is the most prevalent type, characterized by specific product features and a pricing threshold. Lenders must assess a borrower’s capacity to repay by verifying income, assets, and debts.

A key characteristic of a General QM is its price-based test. The loan’s Annual Percentage Rate (APR) must not exceed the Average Prime Offer Rate (APOR) for a comparable transaction by a certain percentage. For a first-lien loan, a conclusive presumption of compliance (safe harbor) applies if its APR is less than 1.5 percentage points above the APOR. If the APR exceeds the APOR by 1.5 percentage points but is less than 2.25 percentage points for a first-lien loan, it may still be a General QM, but it carries a “rebuttable presumption” of compliance. For variable-rate loans, the APR calculation considers the maximum interest rate that could apply during the first five years.

General QMs also have limits on points and fees, typically capped at 3% of the total loan amount for loans greater than or equal to $110,260, adjusted annually for inflation. For smaller loan amounts, the permissible percentage or dollar amount for points and fees can be higher.

Additionally, General QMs prohibit certain loan features. These include negative amortization, interest-only payments, and balloon payments. The maximum loan term for a General QM is 30 years. Lenders are still required to consider and verify a borrower’s debt obligations and income, examining factors such as credit history, employment, and existing debts.

Agency Qualified Mortgage

Agency Qualified Mortgages include loans eligible for purchase by government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, or those insured or guaranteed by government agencies like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). These loans are considered QMs if they adhere to the specific underwriting requirements set forth by their respective agencies.

Agency loans maintain their QM status under permanent rules, provided they meet the rigorous underwriting standards of their governing entities. For instance, Fannie Mae and Freddie Mac guidelines require thorough verification of borrower income, assets, employment history, and debt-to-income ratios. Similarly, FHA, VA, and USDA loans comply with the Ability-to-Repay rule due to their comprehensive qualification criteria. The detailed underwriting processes of these government-backed entities provide sufficient assurance of a borrower’s ability to repay, streamlining compliance for lenders.

Small Creditor Qualified Mortgage

A Small Creditor Qualified Mortgage provides flexibility for smaller financial institutions, such as community banks and credit unions, to offer QM loans. To qualify as a “small creditor,” an institution typically must have total assets below $2 billion and have originated fewer than 2,000 first-lien mortgages in the preceding calendar year, excluding loans held in their own portfolio.

These loans are generally held in the creditor’s portfolio rather than being sold on the secondary market. This portfolio retention aligns the lender’s interest directly with the long-term performance of the loan. For a loan to maintain its QM status, it often must be held in the creditor’s portfolio for a minimum of three years.

Small Creditor QMs offer more flexible underwriting requirements compared to General QMs, particularly regarding the debt-to-income ratio. While the lender must still consider and verify the borrower’s income, assets, and debt obligations, there is no specific DTI limit imposed. This flexibility allows small creditors to serve niche markets or borrowers who might not fit rigid DTI criteria but are otherwise creditworthy.

Small Creditor QMs must still adhere to general product feature prohibitions applicable to all QMs, such as the absence of negative amortization or interest-only payments, and a maximum loan term of 30 years. Points and fees charged must remain within established limits. These loans also benefit from a higher Annual Percentage Rate (APR) threshold for safe harbor or rebuttable presumption, typically up to 3.5 percentage points above the Average Prime Offer Rate (APOR) for first-lien loans.

Balloon-Payment Qualified Mortgage

The Balloon-Payment Qualified Mortgage addresses lending needs in certain geographical areas, particularly for small creditors operating predominantly in rural or underserved communities. A balloon payment refers to a larger-than-normal payment due at the end of a loan term.

For a loan with a balloon payment to qualify as a QM, it must meet several conditions. The loan must have a fixed interest rate and be structured without negative amortization or interest-only payment periods. The loan term must be at least five years. Crucially, the creditor must intend to hold the loan in its portfolio, similar to other small creditor QMs. This portfolio requirement helps mitigate the inherent risk associated with balloon payments.

These loans must comply with the general requirements for small creditor QMs, including limits on points and fees and a thorough assessment of the borrower’s ability to repay, even without a strict debt-to-income ratio limit. The Annual Percentage Rate (APR) threshold for safe harbor or rebuttable presumption for these loans is also set higher, typically 3.5 percentage points above the Average Prime Offer Rate (APOR). This specialized QM type aims to ensure access to credit where other mortgage products might be less available.