Qualified Mortgage


DEFINITION of 'Qualified Mortgage '

A mortgage in which the lender has analyzed the borrower's ability to repay based on income, assets and debts; has not allowed the borrower to take on monthly debt payments in excess of 43% of pre-tax income; has not charged more than 3% in points and origination fees; and has not issued a risky or overpriced loan like negative-amortization, balloon, 40-year or interest-only mortgage. Qualified mortgages begin in January 2014, and provide legal protections for lenders who follow certain regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act

BREAKING DOWN 'Qualified Mortgage '

Under qualified mortgage rules, “safe harbor” provisions protect lenders against lawsuits by distressed borrowers who claim they were extended a mortgage the lender had no reason to believe they could repay. However, the rules also protect both borrowers and the financial system from the risky lending practices that contributed to the subprime mortgage crisis of 2007.

Lenders who issue qualified mortgages can resell them in the secondary market to entities such as Fannie Mae and Freddie Mac. These two government-sponsored enterprises buy most mortgages, which frees up capital for banks to make additional loans. The mortgages are then repackaged to allow investors to acquire a stake in the housing market without owning property directly. The qualified mortgage rules are supposed to ensure that these investments are relatively safe and do not pose the type of systemic risk to the financial system that contributed to the Great Recession.

There are several exceptions to qualified mortgage rules. Points and origination fees may exceed 3% for loans of less than $100,000 (otherwise, lenders might not be sufficiently compensated for issuing such loans, and these smaller mortgages might become unavailable). Also, small lenders, lenders who hold mortgages in their portfolios instead of selling them into the secondary mortgage market and rural lenders face fewer lending restrictions than big-bank lenders.

Qualified mortgage regulations do allow lenders to issue mortgages that are not qualified, but the rules limit the sale of these loans into the secondary mortgage market and provide fewer legal protections for lenders. 

  1. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  2. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  3. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
  4. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  5. Qualified Institutional Buyer - ...

    A corporate entity that falls within the "accredited investor" ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
Related Articles
  1. Insurance

    CDOs And The Mortgage Market

    These structured products contribute to keeping borrowing rates low.
  2. Investing Basics

    CMO vs CDO: Same Outside, Different Inside

    The concept of collateralizing and structured financing predates the market for collateralized mortgage obligations and collateralized debt obligations.
  3. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  4. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  5. Home & Auto

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  6. Mutual Funds & ETFs

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  7. Mutual Funds & ETFs

    The 2007-08 Financial Crisis In Review

    If you don't know how the recession began, read on to learn more.
  8. Investing Basics

    Subprime Lending: Helping Hand Or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  9. Mutual Funds & ETFs

    Who Is To Blame For The Subprime Crisis?

    From lenders to buyers to hedge funds, it appears everyone has blood on their hands.
  10. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!