We are nearly a month into the Consumer Finance Protection Bureau’s (CFPB) rules for Qualified Mortgage (QM). I found a helpful guide to the new rules here: CFPB Whitepaper on ATR and QM. So far, the primary issues we are working through deal with upfront private mortgage insurance. This is required for conventional loans greater than 80% loan to value, or loans with less than a 20% down payment. Part of the QM rule says that all origination charges, including mortgage insurance, must be less than 3% of the loan amount for loans greater than $100,000. The confusion is in regards to refundable versus non-refundable mortgage insurance. The CFPB indicates that refundable doesn’t count unless it exceeds the FHA upfront amount of 1.75%. Many of our investors are requiring that we count the upfront mortgage insurance whether or not it is refundable. Before giving an example of how this can affect a home buyer, let’s review the benefit of upfront mortgage insurance.
For example, a $200,000 loan amount on a purchase price of $210,526 (5% down payment) would require mortgage insurance. On conventional loans, 5 options exist for this mortgage insurance: The buyer can pay it monthly, part monthly and part upfront, all upfront, the lender can pay it (by building it into the interest rate), or the seller can pay it through seller’s contribution (the seller isn’t actually paying it, rather it is built into the purchase price and financed). The cheapest option over time of these 5 is buyer paid upfront. Here’s why: the lowest upfront single premium amount is 1.7% of the loan amount. The cheapest monthly premium is .56% annually. Since PMI is required for 5 years, that means the annual cost x 5 is over 2.5%. So, by paying the MI upfront you recoup your money in a little over 3 years, never have to pay the monthly mortgage insurance as long as you have the loan, and don’t have to worry about getting the PMI cancelled.
Why this is important: if the 1.7% counts into the 3% maximum fees calculation, and the lender charges the customary 1% origination fee (I know some lenders advertise no origination fees – they are simply building it into the rate instead), and the underwriting and processing costs exceed .3% (which they generally would or be close to exceeding that), then the total fees would exceed 3% and the buyer would not get the advantage of having the option of doing one-time, upfront mortgage insurance. It also makes no difference if the lender or seller pay this, it still has to be counted into the 3%. Our solution to this is to move to a split premium (buyer paid part monthly, part upfront), or remove the origination fee. The mortgage and mortgage insurance industries also continue to press the CFPB for clear definition on excluding the refundable upfront premium from the calculation.
The other noticeable change has been in underwriting. Thus far, the underwriters have indicated that they will examine income documentation under a modified lens, or in other words some people that would have qualified before will no longer. The best answer for a home buyer: contact our team to review your scenario. We explore every option available to find the best solution for you and do the underwriting upfront (no pun intended!) to eliminate surprises.