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What? What is QM and why should I care? That will be the reaction of most borrowers when they read an article or have a lender tell them that the loan they may be considering is not "QM". QM is an acronym that refers to Quality Mortgage. Since January 10th of this year lenders were required to be sure that the products that they offer are QM. QM requires higher standards for proof of employment and income, debt ratios, and assets.
QM is a ruling set by the Consumer Financial Protection Bureau to protect consumers from being approved for loans they can't afford or have the probability of not being able to pay back. It keeps lenders from becoming sloppy in their lending practices, and it has set new rules for new financial disclosures for lending that quite frankly, are far less confusing for the consumer than the disclosure forms that HUD has been requiring.
"Yeah, so that's great," you say. "But what does that mean to me?" In practical terms, most of the mortgage choices that are currently available (FHA,VA, USDA and Conventional lending overseen by Fannie Mae and Freddie Mac) are not included in the QM requirements. Debt ratios exceptions and documentation standards remain fundamentally the same...except...
And it is the exceptions that get you, right?
Even though the above mentioned loans aren't held to the new QM standards-lenders are increasing their scrutiny while a loan is in underwriting. For example: from time to time there are an exceptions made to lending rules. One such rule has to do with income if it comes from commission or bonus. The rule is that the borrower must have received this money for two years prior to being able to count it as income. Once in a while a case can be made that the time restriction should be waived. If that request is made, a borrower should expect to produce more material pertaining to income than they might, if they had two years of the commission income. So maybe one more year of tax returns and W2's than normal. Letters from the employer stating whether or not the commission or bonus will continue at present levels may make the difference between and approval and a decline.
Bank statements are examined thoroughly as well. Many of my clients are frustrated when they are asked to produce a paper trail for random large deposits. Lenders don't require this to be difficult-it is done to insure the integrity of the funds. Sometimes it seems ridiculous but if anyone has ever had the IRS breathing down their necks, they would understand that lenders don't need the enforcement arm of all the Federal Agencies available picking through their loan departments. Not only do we have Consumer Financial Protection Bureau issues, HUD issues, but clean lending also involves the Federal Reserve, Homeland Security and the Patriot Act.
May I remind my readers that the 2001 hijackers funded their spree by running large amounts of cash through their respective bank accounts. While it does seem ridiculous to consider a $200 cash deposit as "large", some banks are covering all their federally mandated backsides in great detail.
This emphasis on documentation and verification is especially upsetting to borrowers who purchased a home back in the "anything goes" days and don't understand what all the fuss is about. The Great Recession of 2008 and the role of housing in helping to tank the global economy is what we are talking about-so my expectation is that these requirements are going to be with us for the foreseeable future.
Because of the head scratching nature of many of these new requirements and the extreme changes in lending which make it a much more complex process than ever before, I am going to make a recommendation. (Of course I am, you knew I would didn't you?)
While I know that many first time buyers are very internet savvy and are used to shopping and researching online for just about anything they desire-a mortgage loan isn't a good product to buy when you have no idea who the seller is or how the process is supposed to unfold. Even if you do- if you make application with a large bank will you understand what you are signing and what the terms mean? While I don't mind doing a save for someone who got in over their head with an online lender-the situation creates a huge amount of stress that could have been avoided had the borrow taken the time to sit down face to face and discuss the loan product they were signing up for. Shopping for a loan isn't the same as buying a pair of Nike's online, and making a decision based solely upon the interest rate doesn't get you the service you need to assure you of what you are buying and what the final costs will look like in layman's terms.
I know, I know-you like to do things on line-but keep in mind that when you live in Indiana and you do business with a lender that is headquartered in New York City or Detroit or California you and your Realtor lose control of many facets of the transaction. The lender may choose the title company and that title company may not be located in your community. The appraiser may come from hundreds of miles away and not be familiar with the local market. The loan originator who doesn't ever have to do business in your market again may not keep you or your realtor informed of the progress of the transaction. And that means if you don't know what is going on and your house doesn't close on time-your seller could choose to walk, and you lose-time and money. So my advice is keep it local. Preferably with me!
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