The QRM Rule: Residential Mortgage Rules

Official Device To Prove Future Income

2014 > Qualified Mortgage (QM) or Qualified Residential Mortgage (QRM) Lending Documentation Requirements and,

Ability To Repay (ATR) Documentation Requirements:

Verified minimum of previous 24 months wage earner employment or,

Confirmed previous 24 months self-employed (no blending of self-employed with wage earner); we’ll call this the Bernake syndrome. The former Federal Reserve chairman, speaking in Chicago told the moderator: “just between the two of us, I recently tried to refinance my mortgage and I was unsuccessful in doing so.”The lender must establish the likelihood of continued employment/income for the next 36 months.

The QM/QRM rule became effective on January 10, 2014. Residential mortgages subject to Reg. Z (1-4 unit owner-occupied homes) require the borrower’s income/assets are to be fully documented and verified.

• Two months  of the most recent year to date (YTD) pay advice.
• Wage-earner income must be verified with Federal and State filed 1040’s + all schedules + W-2(s) + 1098(s) + 1099(s).
• Self-employed: Copies of last two years Personal and Business returns including all Schedules, 1099’s, Form 1065 plus K-1, Limited Partner K-1 Forms, sub-chapter S Corporation 1120S plus K-1 Forms, Corporation form 1120 and year to date P&L Statement plus Balance Sheet.
• If income taxes are e-Filed, the entire e-Filed digital filing is required.
• Must be able to reasonably project borrower’s  income and debts over the next three years.

Asset and Other Income Documentation

• Previous two months bank statements – all banks, all accounts with all pages including blank pages.
• Current statements of all investment accounts with all pages including blank pages.
• Current statements of all retirement accounts with all pages including blank pages.
• Current leases to prove leasehold income.
• Other documents as may be required to prove income.

 Standards

• Payment to income ratio (PTI) – Conventional – 28%
• Debt to income ratio (DTI) – Conventional – 43%
• PTI – Government (FHA, VA, USDA) – 38%
• DTI – Government – 44%
• FICO® Scores 640+*

In the present regulatory climate many lenders impose underwriting rules (referred to as “overlays”) that are more restrictive than required by law or regulation. One set of overlays: bankruptcy, foreclosure, short-sale and deed-in-lieu of foreclosure prevent entry or reentry to the mortgage market for certain time periods as displayed here. Points and fees which may charged to borrowers are defined and limited. For the details, click here.

Exceptions to QRM and ATR

Investment properties are exempt. These are provably non-owner occupied residential properties. The proof is provided with 1040’s and schedules as well as the income shown with bank statements and an accompanying lease agreement. Credit Unions and banks serving underserved communities also have certain exemptions. As well, there are non-QM loans which do not feature low down-payment options or highly favorable rates and terms.

Media outtakes/observations from the industry biased view:

“…lenders are imposing higher than usual credit scores and other tough standards on people applying for government-backed mortgages. The lenders say they’re exceeding the government’s own criteria in a bid to insulate themselves from more financial penalties and lawsuits. And several analyses suggest that millions of potential home buyers are getting shut out as a result.” The Washington Post recently published: Why the next pick for U.S. Attorney General has huge implications for the housing industry.

Critique: For a well thought critical observation of potential serious failures of the discussed reforms, read QRM’s Missed Opportunities for Financial Stability and Servicing Reform by Alan Levitin. Mr. Levitin states in part that “… QRM was (a) missed chance to fix servicing for both investors and consumers.”

*On FICO® Scores, the best rates at the lowest cost are available for borrower with a minimum 740 middle score based on the FICO® models used by lenders which are also used by Fannie Mae and Freddie Mac. With lower scores one may expect a higher rate with additional underwriting overlays such as lower DTI and LTV, more liquid assets and higher down payments among other overlays.

• Crystal image attribution

Financially Speaking™ – James Spray, RMLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | October 4, 2014 November 22, 2016

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and  complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal  interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use  this information in whole and not in part providing you give full attribution to James Spray.