What are the 4 types of qualified mortgages and which one is right for you?

When it comes to obtaining a mortgage, it’s essential to understand the different types of qualified mortgages (QM) available. With these in mind, here are the four primary types of qualified mortgages that you should know about.
  • General QM: This type of QM is the most commonly used. It’s designed for smaller lending institutions that have less than $2 billion in assets. General QMs must meet strict criteria set by the Consumer Financial Protection Bureau (CFPB), which includes a debt-to-income (DTI) ratio of 43% or less.
  • Small Creditor QM: This type of QM is geared towards smaller lending institutions. These lenders typically have less than $2 billion in assets and provide mortgages to consumers with below-average income or credit scores. Small Creditor QMs must have a DTI ratio of 43% or less and meet other specific requirements.
  • Balloon-Payment QM: Balloon-payment qualified mortgages require borrowers to make regular payments for a set period, often five to seven years, with a final lump-sum payment due at the end. This type of QM is typically used by borrowers who plan to sell their home or refinance before the balloon payment becomes due. Balloon-payment QMs must also have a DTI ratio of 43% or lower.
  • Temporary QM: This type of QM is available for a limited time period while lenders adapt to new mortgage regulations. For instance, after the 2008 financial crisis, the CFPB created temporary QMs that allowed lenders to provide mortgages to consumers who did not qualify for general or small creditor QMs but still met specific underwriting standards. Temporary QMs must meet the same requirements as general QMs, with a DTI ratio of 43% or less.
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    With these four types of qualified mortgages in mind, it’s important to consider which option is best suited to your unique situation. Working with a qualified mortgage lender or financial advisor can help you determine the best approach to take when it comes to obtaining a mortgage.

    Understanding the 4 Different Types of Qualified Mortgages

    When it comes to purchasing a home, there are different types of loans that you can choose from, depending on your financial situation. One type of loan that is available is called a Qualified Mortgage or QM. A QM is a type of mortgage that complies with guidelines set by the Consumer Financial Protection Bureau (CFPB) and it was designed to protect lenders from potential lawsuits and to ensure that borrowers have the ability to repay their loans. There are four different types of QMs, which are General, Small Creditor, Temporary, and Balloon-Payment. Below we’ll explore what these different QMs entail.

    Benefits of General QM for Borrowers and Banks

    A General QM is a loan that meets all the guidelines set by the CFPB, such as offering a maximum term of 30 years and not charging excessively high upfront fees. One of the most significant benefits of the General QM is that it offers lenders legal protections in the event that a borrower defaults on their loan. Additionally, borrowers who opt for this type of mortgage may be able to access lower interest rates. The General QM is an excellent option for those who want a traditional mortgage that will offer them protections throughout the lifetime of their loan.
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    Conditions and Requirements of Small Creditor QM

    The Small Creditor QM is a type of mortgage that is available to lenders that originate fewer than 2,000 mortgages annually and have less than $2 billion in assets. This type of QM was created to offer lending options to small financial institutions that may not have the same level of resources as larger lenders. Some of the unique conditions of the Small Creditor QM include:
    • The loan must have fixed interest rates
    • The loan term can be no greater than 30 years
    • The points and fees the creditor charges must not exceed 3 percent of the loan amount

    Temporary QM – Eligibility and Benefits

    The Temporary QM is designed for lenders that originate a limited number of mortgages. It allows lenders to offer loans that do not meet certain standards set by the CFPB but still qualify for protections. The loan must be eligible to be purchased, guaranteed or insured by one of the major government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac. The maximum term for this type of QM is also 30 years, and fees and points are capped at 3 percent of the loan amount. The Temporary QM is beneficial for borrowers who may not meet all of the requirements of a traditional mortgage or for those who are considering a mortgage with a nontraditional term or structure.

    Exploring the Balloon-Payment QM Option

    The Balloon-Payment QM allows for lower monthly payments initially, followed by a large final payment that is often referred to as a balloon payment. The final payment will be significantly larger than the preceding payments, and it’s usually due within 5-7 years of the initial closing of the loan. This type of QM is an excellent option for borrowers who anticipate that their income will increase in the near future. Some of the requirements of the Balloon-Payment QM are:
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    • The loan term must be at least 5 years
    • The payment schedule must be based on an amortization that would pay off the principal amount in full over the remaining term of the loan, but with a final payment that is substantially larger than the others

    Choosing the Right Qualified Mortgage that Best Fits Your Needs

    Choosing the right mortgage is essential when buying a home. Each of the four types of Qualified Mortgages offers different benefits and conditions that borrowers should consider. Some borrowers may benefit immensely from having lower fees and higher protections offered by the Small Creditor or General QMs, while others may prefer the lower monthly payments that can come with a Balloon-Payment QM. Whatever your financial situation, it’s important to choose the Qualified Mortgage that best suits your needs, so you can enjoy both the benefits and the peace of mind that comes with owning your own home.

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