Qualified Mortgage

Key Takeaways

• A Qualified Mortgage is a loan that meets the product and underwriting standards in Regulation Z and so carries a presumption that the lender satisfied the ability-to-repay duty.
• Every category of Qualified Mortgage bars negative amortization and interest-only payments, caps the term at 30 years, and limits total points and fees (12 CFR 1026.43).
• The current General QM test is price based: the annual percentage rate must stay below the average prime offer rate plus a threshold that starts at 2.25 percentage points on larger first-lien loans.
• A Qualified Mortgage that is not higher priced gets a conclusive presumption of compliance, while a higher-priced one gets only a rebuttable presumption.

What It Means

A Qualified Mortgage is a category created by Regulation Z, the rule that carries out the Truth in Lending Act. Every closed-end loan secured by a dwelling has to satisfy the Ability To Repay Rule, which requires the creditor to make a reasonable, good-faith determination that the borrower can repay. A Qualified Mortgage is the lane a lender can drive in and know it has met that duty, because a loan inside the category comes with a legal presumption of compliance.

The category is defined by the loan’s features, not by the borrower’s story. Under 12 CFR 1026.43 a Qualified Mortgage may not increase the principal balance, may not let the borrower defer principal through interest-only payments, and may not carry a balloon payment outside a narrow small-creditor exception. The term may not exceed 30 years, and total points and fees are capped.

The price test arrived later. The 2020 General QM Final Rule dropped the old 43 percent debt-to-income ceiling and replaced it with an Annual Percentage Rate threshold measured against the average prime offer rate for a comparable transaction, alongside a duty to consider and verify the borrower’s income or assets, debts, and debt-to-income ratio or residual income. Compliance with the revised definition became mandatory on October 1, 2022.

How It Works in Washington

Regulation Z is federal, but Washington stacks its own limits on the same loan and the Department of Financial Institutions enforces them. RCW 19.144.050 bars a financial institution from making or facilitating a residential mortgage loan that includes provisions imposing Negative Amortization and that are subject to the interagency guidance on nontraditional mortgage product risks, so the single feature a Qualified Mortgage may never have is one Washington restricts on its own authority.

Two more Washington rules sit alongside the federal points-and-fees and disclosure tests. RCW 19.144.020 requires a plain-language disclosure summary of all material terms within three business days of the application, listing the fees and discount points, the interest rate, whether the loan contains a prepayment penalty or a balloon payment, and whether the payments will adjust at the fully indexed rate. RCW 19.144.040 permits a prepayment penalty only where it expires at least sixty days before the initial reset period of an adjustable rate mortgage.

Washington also polices which loan a borrower is pushed into. RCW 19.144.060 forbids a licensed mortgage broker or consumer loan company from steering, counseling, or directing a borrower to a loan product with a risk grade less favorable than the one the borrower would qualify for under the lender’s own underwriting guidelines, prudently applied.

Example

Northline Bank underwrites a first-lien 30-year fixed-rate loan of $400,000 for the Okoros. The loan fully amortizes, has no interest-only period and no balloon, and runs exactly 30 years, so it clears the product tests in 12 CFR 1026.43(e)(2).

Points and fees on the transaction come to $9,800. The cap for a loan this size is 3 percent of the total loan amount, which is $12,000, so the file sits $2,200 under the ceiling.

The rate is locked on a day when the average prime offer rate for a comparable transaction is 6.10 percent, and the loan’s annual percentage rate is 6.72 percent. The spread is 0.62 percentage points, far below the 2.25 point threshold for a first-lien loan of this size, so the loan is a General QM. It also sits below the 1.5 point line that marks a higher-priced loan, so Northline earns the conclusive presumption of compliance rather than the rebuttable one.

Common Mistakes and Exam Traps

• Qualified Mortgage status is not a promise that the borrower can afford the loan. It is a presumption the lender can rely on if the ability-to-repay determination is challenged.
• The 43 percent debt-to-income ceiling is no longer part of the General QM definition. The 2020 General QM Final Rule replaced it with a price-based threshold, mandatory from October 1, 2022.
• Not every Qualified Mortgage gets a safe harbor. A higher-priced Qualified Mortgage carries only a rebuttable presumption of compliance.
• Qualified Mortgage and conforming loan are different tests. Conforming refers to the loan limits for sale to Fannie Mae and Freddie Mac, while Qualified Mortgage is a Regulation Z ability-to-repay standard.