After the financial crisis of 2008, a series of rules and regulations were introduced to minimize risky loans. Out of this came a new class of home loans called Qualified Mortgages (QM). This is overseen by a regulatory body called the Consumer Financial Protection Bureau (CFPB).
Naturally, this poses the question, are VA home loans considered Qualified Mortgages? The good news is that VA loan guidelines do comply with Qualified Mortgage rules.
How Qualified Mortgages work
Qualified Mortgages have a set of requirements that ensure the borrower can afford the loan they want to take out. They also protect the lender from claims that they gave the borrower an unsuitable loan.
As Qualified Mortgages are designed to avoid riskier lending features, they can’t include the following:
- Loan terms beyond 30 years
- Interest-only loans – where the borrower only pays interest on the loan and nothing towards the loan amount
- Balloon payments – where you’re required to pay off the loan in a lump sum after a certain number of years
- Negative amortization – this is when your payment fails to cover all the interest due, causing your principal balance to increase
Alongside these rules, there is also an Ability to Pay rule. This consists of eight financial metrics that lenders must check before they approve a loan. These are metrics that most lenders look at anyway, and include:
- Monthly debt-to-income ratio
- Current debt obligations (including child support or alimony)
- Current income or assets
- Current employment status
- Credit history
- Monthly mortgage or rent payments
- Monthly payments on any other mortgages
- Monthly payments for mortgage-related expenses (like property taxes)
Another requirement for Qualified Mortgages is that the costs and fees can’t usually exceed 3% of the loan amount.
What this means for VA loans
Thorough underwriting and an avoidance of risky lending have been features of the VA loan program for years. This means that you will usually not have to worry about whether VA loans are considered Qualified Mortgages.
On May 9, 2014, the Department of Veterans Affairs (VA) issued a statement saying that all VA loans are defined as safe Qualified Mortgage loans.
What about interest rate reduction refinance loans (IRRRL)?
If you have an existing VA home loan and want to reduce your monthly mortgage payments, an IRRRL is an option. However, this makes the rules around Qualified Mortgages a little less clear.
Most IRRRL are considered Qualified Mortgages but not all of them. To be considered a safe harbor for a QM, the loan must meet these conditions:
- The loan being refinanced must have originated at least six months before the new closing date
- The veteran hasn’t been more than 30 days past due during the six months before the new loan’s closing date
- The recoupment period for allowable fees financed as part of the loan or paid at closing cannot exceed 36 months
- Other VA required for guaranteeing an IRRRL must also be met