Qualified Mortgages or “QMs” have become the talk of the town in the mortgage industry. This all came about in the wake of the mortgage crisis. Lenders that were supplying loans to unqualified borrowers were what set the mortgage industry into a tizzy. In an effort to halt that from occurring again, the government put forth strict rules that all mortgage agencies must follow, including the VA. The government agencies that include the FHA and VA, however, were allowed to create their own rules regarding the Ability-to-Repay and QM rules. In general, the VA has claimed that all VA guaranteed loans fall under the QM status – what varies is to what degree they fall under it.
Understanding QM Loans
Qualified Mortgages or “QMs” are those mortgages that are exempt from any type of borrower litigation against the lender. They are protected because the lender can guarantee without a doubt that the borrower can afford the loan. This way, if down the road, the borrower becomes unable to afford the loan, it is not because of any fault of the lender – the lender did its due diligence in determining the affordability to the borrower. There is another aspect to the QM loan, however; this is called the Rebuttal Presumption Status and it differs from the Safe Harbor Status, which is when the lender is completely exempt from the possibility of litigation.
The Rebuttal Presumption Status still allows a borrower to stake claim against the lender, stating that the lender did not do their part in determining the affordability of the loan. There is slightly less protection to the lender with the Rebuttal Presumption Status.
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How VA Loans can Gain Safe Harbor Status
Every standard VA guaranteed loan has Safe Harbor Status because all aspects of the loan are evaluated before funds are disbursed. This means the lender and the VA can without a doubt confirm that the income, debt ratio, costs, and benefits of the loan are good for the borrower. These rules even apply to the VA IRRRL program as long as the following requirements are met:
- At least six payments must have been made on the current VA loan
- Only one late payment on the current VA payments is allowed in the last 6 months (or 12 months if the loan has been in existence that long)
- The time that it takes to make up for the costs of the refinance versus the savings on the mortgage payment cannot exceed 3 years
- The loan meets the requirements to dismiss income verification or the income is verified appropriately
Any VA IRRRL that does not meet the above requirements would fall under the Rebuttal Presumption Status, giving the borrower a little more leeway in going after the lender should they default on their loan. The most common examples include loans that are not at least six months old or those that have excessive fees that take longer than 36 months to recoup.
In order for a VA IRRRL to not require income verification, there must not be more than one late housing payment in the last 12 months; the principal balance must remain the same or lower (not higher); the costs for the loan do not exceed 3 percent of the loan amount; the interest rate is lower; and there are no risky amortization features. If a loan does not meet these requirements, the income must be verified in order to be a Safe Harbor Loan.
In summary, all VA loans are a QM loan, the degree just varies. The good news is that every borrower has some type of protection and the VA is very careful about who they lend to and how much they lend so as not to put any borrower in danger of losing their home.