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. 

Investopedia explains '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. 


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center