What Is Qualified Mortgage (QM Rule)?
The Qualified Mortgage rule (12 CFR § 1026.43, implementing Dodd-Frank Title XIV) defines a category of mortgage loans that meet specific underwriting standards and receive legal protection if the borrower later claims the lender violated the Ability-to-Repay requirement. QM loans cannot have risky features like negative amortization or interest-only periods and must meet points-and-fees caps. Lenders receive a safe harbor from ATR lawsuits for General QM loans, incentivizing responsible origination.
Key Facts
- The QM rule, effective January 10, 2014, replaced the original 43% DTI hard cap with price-based thresholds in January 2021 — loans with APR more than 2.25 percentage points above the Average Prime Offer Rate (APOR) are generally ineligible for General QM status
- QM loans cannot include risky product features: negative amortization (loan balance grows), interest-only periods, balloon payments (except small creditors in rural/underserved areas), or loan terms exceeding 30 years
- Points and fees on QM loans are capped at 3% of the loan amount for loans of $100,000 or more, scaling to higher caps for smaller loans — excluding third-party charges paid by the lender and bona fide discount points
- Government QM (FHA, VA, USDA, RHS loans) meets QM standards automatically by virtue of meeting their respective agency underwriting guidelines — meaning FHA loans with DTI above 43% can still be QMs if FHA approves them under TOTAL Scorecard
- Safe harbor protection (for General QM below the pricing threshold) means the borrower cannot successfully claim ATR violation unless the lender violated an explicit QM requirement; rebuttable presumption protection (for higher-priced QMs) allows the borrower to rebut the presumption of compliance by showing inability to repay at origination
- Non-QM loans — those that don't meet QM standards but still comply with ATR's 8-factor verification requirement — are legal and serve self-employed borrowers, investors, and those with nontraditional income documentation
Live Data
What Problem Did the QM Rule Solve?
Before the 2008 crisis, mortgage originators had almost no legal incentive to ensure borrowers could repay their loans. The originate-to-distribute model — where loans were immediately sold into mortgage-backed securities — meant originators collected fees upfront and bore none of the default risk. Stated-income loans, no-documentation loans, and NINA (no income, no asset) products were standard practice. The QM rule's purpose was to restore the loan originator's stake in loan quality by creating a legal consequence — ATR liability — for irresponsible underwriting.
The Three QM Categories
The CFPB created multiple QM categories to accommodate different market segments:
- General QM (12 CFR § 1026.43(e)(2)): Available to any lender. Must meet product feature restrictions (no negative amortization, no interest-only, no balloon, max 30-year term), price-based threshold (APR ≤ APOR + 2.25 percentage points for first-lien loans ≥ $110,260 as of 2023), and points-and-fees cap (3% for loans ≥ $100,000). Lender must consider and verify the 8 ATR factors. Full income documentation required — no stated-income origination.
- Government QM: FHA-insured, VA-guaranteed, USDA-guaranteed, and RHS loans automatically meet QM standards by satisfying their respective agency underwriting requirements. This is why FHA loans with DTI above 43% can still be QMs — FHA's own underwriting standards govern, not the General QM price threshold.
- Temporary GSE QM (expired): Loans eligible for purchase by Fannie Mae or Freddie Mac received automatic QM status under a temporary "GSE patch" — regardless of DTI — while the GSEs were in federal conservatorship. This patch expired in October 2022 (extended from the original January 2021 expiration), replaced by the revised General QM price-based standard.
- Small Creditor QM (12 CFR § 1026.43(f)): Available to creditors with assets under $2.202 billion who originate fewer than 500 first-lien mortgages annually. Small creditor QMs may include balloon payments and have a separate pricing threshold (APOR + 3.5 percentage points).
Safe Harbor vs. Rebuttable Presumption
Not all QM loans receive the same legal protection. The level of protection depends on the loan's pricing relative to APOR:
- Safe harbor QM: First-lien loans with APR at or below APOR + 1.5 percentage points (or APOR + 2.25 points for the General QM outer limit). A borrower who claims ATR violation cannot prevail unless the lender violated a specific QM requirement — the safe harbor is nearly absolute protection against ATR claims.
- Rebuttable presumption QM (higher-priced): First-lien loans between APOR + 1.5 and APOR + 2.25 percentage points. The lender is presumed to have complied with ATR, but the borrower can rebut this by demonstrating that at the time of origination they lacked sufficient residual income to cover living expenses after all monthly obligations. Establishing the rebuttable presumption requires detailed income and expense analysis — a high bar in practice.
What the QM Rule Does NOT Prohibit: Non-QM Lending
A common misconception is that non-QM loans are illegal or subprime. They are neither. Non-QM loans simply don't qualify for QM safe harbor protection — they must still comply with the ATR rule's 8-factor verification requirement. Common Non-QM products include:
- Bank statement loans: Qualify self-employed borrowers using 12-24 months of business or personal bank statements rather than tax returns. Useful for business owners whose tax returns show lower income than actual cash flow.
- Asset depletion loans: Qualify borrowers using their liquid assets (divided by a factor representing loan term) as a proxy for monthly income. Serves retirees with substantial assets but limited current income.
- DSCR loans (Debt Service Coverage Ratio): For real estate investors — qualification based on the property's rental income covering the mortgage payment, rather than borrower personal income.
- High-DTI loans: Some lenders make non-QM loans to borrowers with DTI above 43% who have significant compensating factors. The lender bears the full ATR litigation risk if the borrower defaults and claims they couldn't afford it.
The non-QM market is roughly $25-40 billion annually — a fraction of the $2+ trillion overall mortgage market and a tiny remnant of pre-crisis subprime volume.
The DTI Shift: From 43% Hard Cap to Price-Based Threshold
The original 2014 General QM rule set a hard DTI limit of 43% — loans above that were non-QM. The GSE patch, which gave Fannie/Freddie-eligible loans automatic QM status, exempted the majority of the market from this cap. When the GSE patch expired, the CFPB replaced the DTI cap with a price-based threshold:
- Under the new General QM rule (effective March 2021), DTI is no longer a bright-line requirement — lenders must still consider and verify DTI, but there is no maximum. Instead, the loan's APR relative to APOR serves as the proxy for affordability risk.
- The rationale: DTI is an imperfect predictor of ability to repay because it doesn't account for residual income (a borrower with $20,000/month income and 45% DTI has far more financial slack than one with $5,000/month income at the same ratio). APR spread captures the lender's own risk pricing more directly.
Prohibited Product Features Under QM
Regardless of category, all QMs must exclude the most dangerous pre-crisis product features (12 CFR § 1026.43(e)(2)(i)-(iv)):
- Negative amortization: Monthly payments that don't cover accrued interest, causing the loan balance to grow. Central to option-ARM abuses of 2005-2007.
- Interest-only periods: Periods where the borrower pays only interest with no principal reduction. Created payment shock when the interest-only period ended and principal payments began.
- Balloon payments: Large lump-sum payments due at maturity. Borrowers were expected to refinance — which worked until they couldn't. (Small creditor exemption applies in rural/underserved areas.)
- Loan terms exceeding 30 years: Prohibits 40-year or 50-year mortgages that extend amortization to reduce payments at the cost of massive total interest.
State-by-State Variations
The QM rule is federal law under TILA (Regulation Z), and states cannot weaken its standards. However, some states have enacted additional anti-predatory lending laws that impose restrictions beyond what QM requires, particularly on high-cost loans and prepayment penalties.
| State | Key Difference |
|---|---|
| North Carolina | North Carolina was the first state to enact comprehensive anti-predatory lending law (N.C.G.S. § 24-1.1E, 1999) — predating Dodd-Frank by 11 years. NC's law prohibits negative amortization and flipping (refinancing without net benefit to the borrower) for high-cost loans, standards later incorporated into the federal QM framework. |
| New Mexico | New Mexico Home Loan Protection Act (N.M.S.A. § 58-21A) imposes additional restrictions on high-cost loans (those with APR 8+ points above Treasury) — prohibiting balloon payments, call provisions, and mandatory arbitration clauses beyond what federal QM rules require. |
| Massachusetts | Massachusetts Anti-Predatory Lending law (M.G.L. c. 183C) imposes a suitability standard for high-cost home loans — lenders must determine that the loan provides a net tangible benefit to the borrower, a higher bar than federal ATR's ability-to-repay standard. |
| New York | New York Banking Law § 6-l (High-Cost Home Loans) imposes additional restrictions on loans exceeding points-and-fees thresholds — including restrictions on prepayment penalties, balloon payments, and negative amortization for state-chartered lenders beyond the federal QM standards. |
| Illinois | Illinois High Risk Home Loan Act (815 ILCS 137) regulates high-cost loans with APR 8+ points above Treasury — prohibiting negative amortization, call provisions, and prepayment penalties for state-licensed lenders. Supplements QM's product restrictions at a lower income-level threshold. |
Frequently Asked Questions
Can a lender make a loan that doesn't meet the QM rule?
Yes. Non-QM loans are legal as long as the lender complies with the Ability-to-Repay rule's 8-factor verification requirement. QM creates a safe harbor — lenders who make QMs have strong legal protection against ATR claims. Non-QM lenders bear more litigation risk if a borrower later claims they couldn't repay. The non-QM market is roughly $25-40 billion annually, serving self-employed borrowers, investors, and those with non-traditional income.
What is the difference between QM safe harbor and QM rebuttable presumption?
Safe harbor QM (lower-priced loans) means a borrower cannot bring a successful ATR claim unless the lender violated a specific QM requirement — protection is nearly absolute. Rebuttable presumption QM (higher-priced loans, APOR +1.5% to +2.25%) means the lender is presumed compliant, but the borrower can rebut this by showing insufficient residual income at origination. Rebuttable presumption loans carry more litigation exposure but still provide strong protection.
Does the QM rule limit how much I can borrow?
Not directly. The QM rule sets underwriting standards (no risky product features, points-and-fees caps, price-based thresholds) but doesn't cap loan amounts. However, the price-based threshold means very high-rate loans can't qualify as General QM — and very high DTI borrowers may struggle to find lenders willing to make non-QM loans that accept the added litigation risk. In practice, QM standards function as an indirect borrowing limit for heavily leveraged borrowers.
Are FHA loans subject to the 43% DTI limit under QM?
No. FHA loans qualify as Government QM by meeting FHA's own underwriting standards — they don't need to meet the General QM price-based threshold or DTI standards. FHA's TOTAL Scorecard can approve loans with DTI up to 57% with compensating factors. This is a key reason FHA serves higher-DTI borrowers and why FHA's serious delinquency rate (11.52%) is significantly higher than the conventional market.
What happened to the GSE patch and the 43% DTI cap?
The original General QM rule set a hard 43% DTI limit. However, the Temporary GSE QM (the 'patch') gave Fannie/Freddie-eligible loans automatic QM status regardless of DTI — and most of the market used the patch rather than the General QM. The patch expired in October 2022. The CFPB replaced the DTI cap with a price-based threshold (APR relative to APOR), recognizing that DTI is a poor standalone predictor of ability to repay.