Buying a home can be complicated, especially when understanding the different types of mortgages. Qualified mortgages (QMs) are loans that follow specific rules to make sure they are safe and affordable for borrowers. Let’s break down the four main types of QMs in a way that’s easy to understand.
1. General Qualified Mortgages
What They Are:
These are the most common types of loans, and they meet strict rules to ensure you can afford your mortgage payments.
Key Points:
– Reasonable Fees: Fees for the loan can’t be too high (usually no more than 3% of the loan amount).
– Safe Features: No risky stuff like interest-only payments or loans that get bigger over time.
– Prove You Can Pay: Lenders must check your income, job, and other debts to ensure you can afford the loan.
– Debt Limits: Your monthly debt payments (including the mortgage) shouldn’t be more than 43% of your income.
2. Temporary Qualified Mortgages
What They Are:
These loans are a bit more flexible and are usually backed by government agencies like Fannie Mae and Freddie Mac.
Key Points:
– Government-Backed: These loans must be eligible for government agencies’ support.
– Flexible Debt Limits: The 43% debt limit can be higher if the loan meets government standards.
– Temporary Rules: These rules were meant to be short-term but have been extended to help more people get loans.
3. Small Creditor Qualified Mortgages
What They Are:
These loans are designed for smaller lenders, like community banks and credit unions, to make sure they can help their local customers.
Key Points:
– Small Lenders: The lender must have less than $2 billion in assets and make fewer than 500 loans per year.
– Lender Keeps the Loan: These loans usually stay with the lender instead of being sold to big investors.
– Flexible Rules: Similar to General QMs, but more flexible, especially for local and smaller communities.
– Special Option: In some rural areas, these loans can include a big payment at the end (balloon payment).
4. Balloon-Payment Qualified Mortgages
What They Are:
These are special loans for people in rural or underserved areas that include a big payment at the end of the loan term.
Key Points:
– Special Areas: Only available through small lenders in rural or underserved areas.
– Big Payment at the End: You might have to make one large payment at the end of the loan.
– Long-Term Loans: These loans usually last at least five years.
– Affordability Check: Lenders must ensure you can afford that big payment when it comes due.
Conclusion
Understanding these four types of qualified mortgages can help you find the right loan for your situation. General QMs are the most common and safest, while Temporary QMs offer more flexibility with government backing. Small Creditor QMs and Balloon-Payment QMs provide special options for smaller lenders and rural areas.
Knowing the basics of each type can make the mortgage process less confusing and help you make better decisions when buying a home.