When considering purchasing an investment property, one question I often hear is whether these properties are subject to QM (Qualified Mortgage) points and fees. The short answer is, it depends. Understanding how the QM rule applies to investment properties, and what it means for points and fees, can make a significant difference in your financial strategy.
I’ve been working with real estate investments for years, and as I’ve navigated through the various types of loans available, including Qualified Mortgages, I’ve come to appreciate how important it is to understand the rules that govern these financial tools. Investment properties, unlike primary residences, face different criteria when it comes to QM status, which impacts how points and fees are calculated and managed.
In this article, I will explore the nuances of Qualified Mortgages, particularly in the context of investment properties, and provide a detailed explanation of how they affect the investment process. I will also cover the implications of QM points and fees, offer examples to clarify the concepts, and guide you through the decision-making process when financing an investment property.
Table of Contents
What is a Qualified Mortgage?
Before diving into the specifics of investment properties and QM points and fees, let’s first define what a Qualified Mortgage is. A QM is a type of loan that is designed to meet specific underwriting guidelines and is intended to protect borrowers from taking on excessive debt they cannot afford.
The Consumer Financial Protection Bureau (CFPB) established the QM rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The goal is to make sure that lenders only offer loans to borrowers who have the ability to repay. For a mortgage to be considered “qualified,” it must meet certain criteria, including:
- No excessive fees: The loan must meet specific limits on points and fees.
- Strict debt-to-income (DTI) ratio: The borrower’s DTI must not exceed 43%.
- No risky loan features: The loan cannot have features such as interest-only payments, balloon payments, or negative amortization.
- Maximum loan term: The loan term must not exceed 30 years.
For investment properties, though, the situation is a bit different. I’ll break this down in more detail in the following sections.
How Investment Properties Differ from Primary Residences
When it comes to mortgages, lenders often distinguish between primary residences and investment properties. While both types of loans can be qualified mortgages, the criteria can vary based on the type of property you are financing.
The primary differences that can affect whether or not investment properties are subject to QM points and fees include the following:
- Higher Risk: Investment properties are generally considered higher risk because they are not owner-occupied. As a result, lenders may impose stricter terms on investment property loans.
- Down Payment: Investment property loans typically require a larger down payment—often 20% or more, compared to 3-5% for primary residences. This is one of the factors that can lead to higher points and fees in some cases.
- Interest Rates: Investment property loans often come with higher interest rates because they are riskier for lenders. However, this doesn’t automatically mean the loan will fail to meet QM standards.
Points and Fees in Qualified Mortgages
Now that we have a basic understanding of what constitutes a QM, let’s discuss points and fees. Points and fees refer to the costs associated with securing a loan, including things like origination fees, processing fees, and discount points (which are prepaid interest). The CFPB has established a cap on points and fees for Qualified Mortgages.
Under the QM rule, the total points and fees must not exceed 3% of the total loan amount for loans larger than $100,000. For loans less than $100,000, the percentage can be higher, but the total amount is capped.
Points and Fees for Investment Properties
When it comes to investment properties, the points and fees structure can differ based on whether the loan qualifies as a Qualified Mortgage or not. Here’s how this plays out:
1. Standard QM Loans
For standard QM loans, the total points and fees cap is 3% of the loan amount for loans above $100,000. This means if you’re taking out a $200,000 loan for an investment property, the total points and fees should not exceed $6,000.
Example:
Let’s say you’re purchasing an investment property worth $200,000 and securing a loan for $160,000. If the points and fees total $4,800, then the loan would be compliant with the QM rule since $4,800 is less than the $6,000 cap (3% of $200,000).
| Loan Amount | Points and Fees | 3% Cap on Points and Fees | Compliance Status |
|---|---|---|---|
| $200,000 | $4,800 | $6,000 | Compliant |
| $200,000 | $7,500 | $6,000 | Non-compliant |
2. Small Loans (Under $100,000)
For loans below $100,000, the points and fees cap increases. The exact cap depends on the size of the loan, but it generally allows for a greater percentage.
Example:
If you secure a loan for $80,000 to purchase an investment property, the cap on points and fees might be 5%, which equals $4,000.
| Loan Amount | Points and Fees | 5% Cap on Points and Fees | Compliance Status |
|---|---|---|---|
| $80,000 | $4,000 | $4,000 | Compliant |
| $80,000 | $4,200 | $4,000 | Non-compliant |
As you can see, when dealing with smaller loan amounts, the cap increases, but the total amount of points and fees must still stay within these thresholds for the loan to be classified as a QM.
Non-QM Loans and Investment Properties
Sometimes, an investment property loan may not qualify as a QM loan. In these cases, the borrower may face different rules regarding points and fees. A non-QM loan is essentially a loan that doesn’t meet the requirements for a Qualified Mortgage, which could be due to various reasons such as:
- A higher debt-to-income ratio than 43%
- More than 3% points and fees for loans greater than $100,000
- Riskier loan features, such as balloon payments or interest-only payments
While non-QM loans don’t have the same caps on points and fees, they tend to come with higher interest rates and more rigid qualification requirements. This is something you should consider when deciding whether to opt for a QM or non-QM loan.
Comparison Table: QM vs. Non-QM Loan for Investment Properties
| Criteria | QM Loan | Non-QM Loan |
|---|---|---|
| Loan Type | Qualified Mortgage | Not Qualified Mortgage |
| Points and Fees Cap | 3% of loan amount (for loans >$100,000) | Higher caps (varies by lender) |
| Interest Rate | Generally lower | Generally higher |
| Risk Level | Lower (based on strict underwriting) | Higher (more flexibility in terms) |
| Features Allowed | Fixed-rate, adjustable-rate, no risky features | Can have balloon payments, interest-only, etc. |
What This Means for You
If you’re planning to purchase an investment property, it’s crucial to consider the points and fees associated with the loan and whether the property qualifies for a QM loan. Investment property loans with excessive fees can be costly, especially if they push the total amount above the 3% cap, which could jeopardize the loan’s QM status.
By carefully evaluating your financing options, including the potential points and fees, you can make better-informed decisions that align with your financial goals. A higher-interest non-QM loan might offer more flexibility, but it comes with its own set of trade-offs, including increased risk and potentially higher points and fees.
Conclusion
In conclusion, investment properties can be subject to QM points and fees, but the rules vary depending on the size of the loan and whether the loan qualifies as a Qualified Mortgage. It’s important to be aware of the specific caps on points and fees for different loan amounts and to understand the implications of selecting either a QM or non-QM loan. By understanding these aspects, you can navigate the investment property loan landscape more effectively and make decisions that maximize your financial success.
Understanding how investment property loans interact with QM points and fees isn’t just about following rules—it’s about ensuring that your investments are financially sound and sustainable. Whether you choose a QM or non-QM loan, make sure you factor in all the costs, including points and fees, and consider how they align with your long-term investment strategy.
