What Is the Difference Between QM and Non-QM?
Understand the core differences in mortgage classifications and how these distinctions shape loan accessibility and terms for borrowers.
Securing a home loan can be complex, as the mortgage market is influenced by economic factors and regulations. Interest rate fluctuations, for instance, significantly impact borrowing costs and homeownership affordability. Various loan structures exist, each designed to meet different financial needs. Understanding the distinctions between these classifications is important for both lenders and potential homeowners. This knowledge helps borrowers make informed decisions that align with their financial goals and repayment capabilities.
Understanding Qualified Mortgages
A Qualified Mortgage (QM) is a type of home loan designed to ensure lenders have made a reasonable determination of a consumer’s ability to repay the debt. This classification was established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act to prevent risky lending practices. A key benefit for lenders originating QM loans is a “safe harbor” from legal liability under the Ability-to-Repay (ATR) rule, overseen by the Consumer Financial Protection Bureau (CFPB).
The ATR rule mandates that before issuing a residential mortgage, a lender must assess a borrower’s capacity to repay the loan. This assessment involves considering factors such as the borrower’s current income and assets, employment status, and existing monthly debt obligations like other mortgages, alimony, and child support. Lenders also review credit history to determine financial reliability.
To qualify as a QM, a loan must avoid certain risky features. These prohibited characteristics include interest-only payments, where the principal balance does not decrease, and negative amortization, which causes the loan balance to increase over time. QMs do not permit large balloon payments at the end of the loan term, nor can their terms extend beyond 30 years.
Another characteristic of a QM is a cap on upfront points and fees charged by the lender. For many loans, these charges cannot exceed 3% of the total loan amount. This percentage can be higher for smaller loan amounts to account for fixed origination costs. Certain legitimate third-party charges, such as appraisal or title fees, are excluded from this calculation.
Historically, a key requirement for a general QM was a strict debt-to-income (DTI) ratio limit, often set at 43%. However, the CFPB revised this, shifting the primary determinant of QM status from a rigid DTI cap to a price-based threshold, comparing the loan’s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR). Despite this change, lenders still consider and verify a borrower’s DTI or residual income during underwriting. Loans meeting QM criteria receive a “safe harbor,” protecting lenders against claims of insufficient ability-to-repay assessment, though this protection can be rebuttable for certain higher-priced QMs.