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What is a Qualified Mortgage?
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What is a Qualified Mortgage?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

In short, a Qualified Mortgage is a loan that meets a specific set of rules outlined by the government.  Qualified mortgages are intended to be better and safer for borrowers, lenders and the investors that purchase mortgages as compared to the risky and more exotic loan products of the past.  In January 2014, the government implemented guidelines that determine if a mortgage is a Qualified Mortgage (QM).  The rules are designed to ensure that borrowers obtain mortgages that they can afford.  The QM guidelines focus on the borrower’s ability to make their monthly payment, repay the mortgage over time and the key loan features. A loan qualifies as a Qualified Mortgage if it meets the following rules:

Simply put, if a mortgage complies with the Qualified Mortgage guidelines, the lender will receive certain legal protections if they sell that loan to a government sponsored enterprise, such as Fannie Mae or Freddie Mac (lenders sell loans so that they can use the proceeds to make additional loans).  If the loan does not meet the Qualified Mortgage guidelines then these government sponsored enterprises are not allowed to buy it, which exposes the lender to more risk both financially and legally.  

The table below shows mortgage terms including interest rates, fees and APRs for QM loans.  We recommend that you contact multiple lenders in the table and request loan proposals.  Comparing lenders is the best way to find the program and mortgage that meet your needs.

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Current Mortgage Rates in Ashburn, Virginia as of November 23, 2020
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Data provided by Brown Bag Marketing, Inc. Payments do not include amounts for taxes and insurance premiums. Read through our lender table disclaimer for more on rates and product details.

It is important to note that just because a loan does not comply with Qualified Mortgage guidelines does not mean that the borrower does not qualify for the loan or that the lender will not make the loan.  Many lenders offer mortgages to borrowers even if the borrower’s debt-to-income ratio exceeds the maximum limit  outlined above, as long as the lender determines that the borrower can repay the loan.  Additionally, lenders may also offer mortgage programs, such as interest only loans, that do not comply with the QM guidelines.

For mortgages that do not meet Qualified Mortgage regulations, lenders usually keep these loans on their books or sell them to different investors who are aware of their higher risk profile.  From the borrower's standpoint, you should always fully understand the terms and features of your loan and if it qualifies as a Qualified Mortgage.  If you get a loan that is not a Qualified Mortgage, be aware of the added risks involved and make sure you can afford the loan now and in the future. 

Certain lenders actually specialize in Non-Qualified Mortgages, also known as non-QM loans.  These lenders usually focus on credit-challenged borrowers or applicants with unique income, employment or financial circumstances.  Private money lenders, also known as hard money lenders, usually focus on non-QM loans.  Private money lenders offer alternative loan programs to borrowers who cannot qualify for a mortgage with a traditional lender.

Private money loans usually charge a much higher mortgage rate and fees and may also include more onerous terms such a prepayment penalty. You may also be required to make a larger down payment or have more equity in the property. Borrowers should be sure to understand the extra costs and terms required by private money loans and other non-QM mortgage products.

Use the FREEandCLEAR Lender Directory to search by loan program and lender type including traditional and private money lenders.

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Sources

“What is a Qualified Mortgage?”  CFPB.  Consumer Financial Protection Bureau, August 1 2017.  Web.

About the author
Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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