Qualified Mortgage vs. Qualified Residential Mortgage

The terms ‘Qualified Mortgage’ versus ‘Qualified Residential Mortgage’ are loan identifiers that will be completely foreign to the average borrower, but are terms industry professionals may, or at least should, become familiar with as part of the latest industry reform.

Granted that the terms do sound similar, but there is just enough difference that they do need to be distinguished from one another.

The National Association of Home Builders (NAHB) has defined a ‘Qualified Mortgage’ (QM) as “all mortgages that will be available to consumers.” It’s a broad definition but would be guided by specific standards for consumer loans, these being established by guidelines and standards driven by industry reform via the Dodd-Frank legislation. Some of these guidelines are just now coming to the forefront.

The NAHB suggests that any loan originated outside these guidelines may be categorized as “predatory” lending.

A “Qualified Residential Mortgage” (QRM), is distinguished as being any loan “that can be sold by the lender on the secondary market.” Traditionally Fannie Mae and Freddie Mac have been the primary buyers of these loans on the secondary market, but lenders are not required to sell their loans on the secondary market.

Lenders have a pool of capital available to them to give out in the form of loans, in this case home loans. In order to continue the process of making new home loans, lenders will typically sell these mortgages on the secondary market in order to refresh their capital resources quickly. Because of this the QRM would become the industry standard for these loans.

The NAHB says that the QM guidelines will fall under the “ability-to-pay” provisions of the Dodd-Frank legislation. The intent is to be sure that borrowers have a “reasonable chance” in paying back the desired loan. Some of the more important rules will be that there are to be no negative amortization or interest only loans, points and fees cannot exceed 3% of the loan amount, and income and assets must be verified.

The NAHB offers more information relative to QM and QRM standards. See the web address below and scroll down to the bottom of the page in order to be directed to additional information.

Kevin Hartmann