Qualified Mortgage (QM) standards kicked in as of January 10, 2014. Under the Dodd Frank Reform Act, lenders will need to meet more stringent guidelines in order to fall under the QM safe harbor, be protected from liability. Otherwise, they may be held liable for selling a loan that a borrower can’t afford. One of the major points of QM is that the borrower can’t have their total debt exceed 43% of their total income. There are many borrowers who purchased homes last week that exceeded the 43% Debt to Income ratio. Today, they would not be able to get the same loan.
In my opinion, these new rules under QM are going to shrink the lending landscape even more. Smaller lenders may get out of the mortgage business altogether because it may prove to be too risky for them. It’s the big lenders who will benefit from these new rules. Many of them plan not to adhere to these rules because they can keep the loans in their own portfolios rather than sell them in the secondary market. And now they will have less competition and larger share of the business.
We will see how this all plays out in the coming weeks and months. But if you’re looking to buy a home and your debt (including the mortgage) exceeds 43% of your income, then you will probably be doing business with one of the big lenders like Wells Fargo, Bank of America, and Chase. Wells Fargo, for instance, will still go up to 50% debt to income ratio.