Qualified Mortgage (QM)

A qualified mortgage is a closed-end home loan that satisfies the definition in 12 CFR 1026.43(e) and, by doing so, gives its creditor a presumption of compliance with the ability-to-repay requirement in 12 CFR 1026.43(c). The general definition requires "regular periodic payments that are substantially equal" that do not "result in an increase of the principal balance", defer repayment of principal or "result in a balloon payment"; a loan term of no more than 30 years; total points and fees within a cap that scales with loan size; underwriting at "the maximum interest rate that may apply during the first five years"; verified income, assets and debts; and an annual percentage rate no more than a stated margin above the average prime offer rate for a comparable loan. The CFPB's official name for the whole framework is the "Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule)"; this page covers the qualified-mortgage half, and the ability-to-repay rule covers the lender's underlying duty.

Why the category exists. The Dodd-Frank Act added 15 U.S.C. 1639c, which bars a creditor from making a residential mortgage loan "unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan". That duty is open-ended, and a lender that gets it wrong faces damages under 15 U.S.C. 1640(a)(4) equal to "the sum of all finance charges and fees paid by the consumer", plus the borrower's right under 1640(k) to raise the violation as a defense to foreclosure "without regard for the time limit on a private action". Congress therefore also defined a qualified mortgage in 1639c(b) and allowed a creditor to "presume that the loan has met the requirements of subsection (a), if the loan is a qualified mortgage." The definition is a trade: give up the loan features most associated with payment shock, and the lender gets legal certainty.

Two strengths of presumption. Regulation Z splits the reward at 12 CFR 1026.43(e)(1). A qualified mortgage that is not a "higher-priced covered transaction" gets a safe harbor: the creditor "complies with the repayment ability requirements", full stop. A qualified mortgage that is higher-priced gets only a rebuttable presumption, which a borrower can defeat by showing that the income, debts and payments the creditor knew about at closing "would leave the consumer with insufficient residual income or assets" to meet living expenses. Under 1026.43(b)(4), a first-lien loan is higher-priced when its APR exceeds the average prime offer rate (APOR) by 1.5 percentage points or more, a subordinate lien at 3.5 points or more; a first-lien small-creditor or balloon-payment qualified mortgage under (e)(5), (e)(6) or (f) uses the wider 3.5-point line instead. So the same loan can be a QM and still carry only the weaker presumption.

The general definition, feature by feature. Under 1026.43(e)(2) the payments must be "substantially equal" apart from rate changes on an adjustable-rate or step-rate loan, and they may not increase the principal balance (negative amortization), defer principal (an interest-only period), or end in a balloon payment as defined in 1026.18(s)(5)(i). The term may not exceed 30 years. Points and fees, as defined in 1026.32(b)(1), may not exceed the cap in (e)(3), which is 3 percent of the total loan amount for loans at or above the largest inflation-indexed tier, and steps to 5 percent and then 8 percent for progressively smaller loans, with fixed-dollar caps between the percentage bands; the regulation itself directs readers to "the official commentary to this paragraph (e)(3)(ii) for the current dollar amounts", because every dollar figure in the paragraph is adjusted each January 1 by the change in the CPI-U. The creditor must underwrite using "the maximum interest rate that may apply during the first five years" and a payment that repays the loan over its term, and must consider and verify "current or reasonably expected income or assets", debts, alimony and child support, and the monthly debt-to-income ratio or residual income, using third-party records.

The price test that replaced the 43 percent rule. Until the CFPB's 2020 General QM Loan Definition rule and its 2021 amendment, the general category carried a 43 percent debt-to-income ceiling measured under a detailed Appendix Q, alongside a temporary category for loans eligible for purchase by Fannie Mae or Freddie Mac, known informally as the GSE patch. Neither survives in the current text: the phrase "43 percent" appears nowhere in 12 CFR 1026.43 as it reads today, and the temporary category is gone. In their place, paragraph (e)(2)(vi) requires that the APR not exceed the APOR for a comparable transaction by 2.25 or more percentage points on a first lien in the largest loan-size tier, with wider allowances of 3.5 and 6.5 points for smaller first liens, manufactured-home loans and subordinate liens. The loan-size boundaries that select the spread are also CPI-indexed and are not printed here. For an adjustable-rate loan the APR for this test is computed by treating the highest rate possible in the first five years as if it ran for the whole term.

The other routes to qualified status. Under (e)(4), a loan is a qualified mortgage if HUD, the Department of Veterans Affairs or the Department of Agriculture defines it as one under their own regulations, so FHA, VA and USDA loans reach the status through their own rulebooks rather than the CFPB's price test. Under (e)(5), a small creditor holding the loan in portfolio is excused from the price test in (e)(2)(vi), but not from the underwriting work: it must still consider and verify income or assets, debts, alimony and child support, and consider the borrower's debt-to-income ratio or residual income. The loan also loses the status if legal title is transferred within three years, with stated exceptions. Under (f), a small creditor operating in rural or underserved areas can make a balloon-payment qualified mortgage if it underwrites the scheduled payments excluding the balloon. And under (e)(7), a first-lien, fixed-rate, fully amortizing loan that the creditor keeps in portfolio becomes a "seasoned" qualified mortgage after a 36-month seasoning period with "no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days", provided it is not a high-cost mortgage. A seasoned QM gets the safe harbor even if it was higher-priced at closing.

What falls outside. A loan that fails any element is a non-qualified mortgage, usually shortened to non-QM. The label says nothing about legality: jumbo loans underwritten on bank statements, interest-only loans and loans with a 40-year term are all lawful, and the creditor must simply make and document the full ability-to-repay determination under 1026.43(c) without a presumption to lean on. Nor does non-QM mean high-cost. The high-cost mortgage rules in 1026.32 run an independent test on price and fees, and a loan can fail the QM checklist while sitting well below the high-cost triggers.

A lender testing whether a loan is a general qualified mortgage under 12 CFR 1026.43(e)(2) walks through the conditions in order. Payment shape first: the scheduled payments must be substantially equal, with no negative amortization, no interest-only period and no balloon payment. Term second: 30 years or less. Points and fees third, against the loan-size tier the loan falls into. Underwriting fourth: the payment is computed at the highest rate possible in the first five years and must fully amortize the loan, and the borrower's income, assets and debts are considered and verified against third-party records. Price last: the APR is compared with the average prime offer rate for a comparable loan on the day the rate was set.

Consider an example. Rosa borrows $320,000 on a 30-year fixed-rate first mortgage, a loan amount well above the smallest of the regulation's inflation-indexed loan-size tiers, so the tightest spreads apply. The payment is level for 360 months, so the payment-shape and term conditions are met. Total points and fees come to $7,200: $7,200 divided by $320,000 is 0.0225, or 2.25 percent, which is under the 3 percent cap for loans in the largest tier. The lender verified her pay stubs and tax transcripts and pulled her credit report for her debts. Her APR is 6.40 percent and the APOR for a comparable loan that day is 6.10 percent, a spread of 0.30 percentage points. That is below the 2.25-point ceiling in (e)(2)(vi), so the loan is a qualified mortgage, and because 0.30 is also below the 1.5-point higher-priced threshold in (b)(4), the lender has the full safe harbor.

Now change one number. Suppose Rosa's credit profile priced the loan at an APR of 8.00 percent against the same 6.10 percent APOR, a spread of 1.90 points. The loan is still a qualified mortgage, because 1.90 is under 2.25. But 1.90 is at or above 1.5, so the loan is a higher-priced covered transaction, and the lender holds only a rebuttable presumption of compliance. If Rosa later showed that her documented income, debts and payment left her without enough residual income for living expenses, that presumption could be overcome. Push the APR to 8.50 percent, a spread of 2.40 points, and the loan is no longer a general qualified mortgage at all; the lender may still make it as a non-QM loan, but only on the strength of its own ability-to-repay determination.

Pros

• The checklist rules out the features that produced the worst payment shocks before 2008: growing balances, deferred principal, balloon payments and fee-heavy pricing.
• Because most lenders want the presumption, the category shapes the mainstream market, so a borrower who fits it faces broad competition and standardized terms.
• The price test is objective and published. A borrower can ask for the APR and the APOR and see where the loan sits.
• Several routes in mean FHA, VA and USDA borrowers, and customers of small community lenders, are not shut out by a one-size test.

Cons

• The presumption protects the lender, not the borrower. A qualified mortgage can still be unaffordable for a particular household; the rule certifies process, not outcome.
• The dollar tiers that set the points-and-fees cap and the price-test spread move every January, so a figure quoted from last year's commentary can be wrong this year.
• Non-QM loans are lawful and sometimes the right tool, but the label pushes them into a smaller, more expensive corner of the market.
• Fitting the box can exclude sensible structures, such as an interest-only period matched to a known future income change, that a lender would otherwise underwrite on the facts.