The ATR/QM rule: What it is and what borrowers should know

When you take out a loan to buy a home, it’s important that you’re able to afford your mortgage. Lenders will review your finances during the underwriting process to assess your ability to take on the mortgage. The ability to repay/qualified mortgage rule was created by the government to require lenders to consider specific factors about a borrower’s ability to repay a loan before it can be issued.

The ATR/QM rule helps make mortgages more accessible while still holding lenders accountable. This information can be complex, so let’s carefully examine how the ATR/QM rule supports home buyers like you.

The ability-to-repay/qualified mortgage rule, explained

The ATR/QM rule requires lenders and creditors to make a “reasonable and good faith determination” of a consumer’s ability to repay a loan according to its terms in order to issue a residential mortgage. If a lender doesn’t follow the ATR/QM Rule, borrowers may have more legal protection against foreclosure. That’s because these lenders could be viewed as not sufficiently protecting their borrowers.

These requirements were put in place to help ensure that:

• You are issued a loan with terms that are fair to you given your financial situation.
• That you have the ability repay your mortgage in the long term.

The ATR/QM Rule also sets in place other provisions that limit prepayment penalties and enforce record-keeping up to 3 years after both parties sign the loan contract.

What do ‘ATR’ and ‘QM’ stand for?

ATR stands for ability to repay. QM stands for qualified mortgage. A QM is a mortgage that meets requirements established by the Consumer Financial Protection Bureau.

What is considered a qualified mortgage?

A qualified mortgage is a loan that follows the ability-to-repay rule and meets specific requirements. First, it must not have risky loan features, such as:

• Negative amortization
• A term longer than 30 years
• Balloon or interest-only payments
• Fees that exceed 3% of the full loan amount

Secondly, the creditor must consider and verify the borrower’s income, assets, and debts. The creditor must also consider how much your monthly income goes toward paying your monthly debt, known as your debt-to-income ratio. Alternatively, the creditor may consider your residual income, which is how much of your income is left after paying your monthly debt.

There are four categories of qualified mortgages:

• General
• Temporary
• Small Creditor
• Ballon payment

Which factors must the lender consider?

When a creditor makes a good faith determination, they must verify the information about your finances through reliable sources.

Creditors will consider eight factors:

• Current or expected income or assets
• Current employment status
• Loan payment amount
• Any simultaneous loans secured by the same property
• Ongoing expenses related to the property
• Additional debt, such as alimony or child support
• DTI ratio
• Credit history

The lender can consider additional conditions if they choose.

The ATR/QM rule from the beginning: A brief history

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly known as the Dodd-Frank Act. Dodd-Frank amended the 1968 Truth in Lending Act, otherwise referred to as Regulation Z.

The Dodd-Frank Act reformed the financial system and added new government agencies to carry out these reforms. The goal was to help avoid another financial crisis like the one that occurred in 2008. These reforms were also designed to protect consumers and prioritize fair lending practices.

Multiple provisions from Dodd-Frank took effect over several years, including the ATR/QM rule. Some provisions and features have changed over time, such as temporary government-sponsored enterprise QMs, which include loans sold through entities like Fannie Mae or Freddie Mac.

Updates to the ATR/QM rule

In 2020, the ATR/QM rule was updated to protect consumers without overly limiting mortgage approvals. Many changes addressed the GSE Patch, which allowed borrowers who might not have qualified based on their debt-to-income ratio to move forward if their loans were eligible for purchase or guarantee by Fannie Mae and Freddie Mac.

Amended general QM rule

The amended general QM rule replaced the DTI limitation. It was replaced with a newer limitation based on the APR limitation. Compared to the 43% DTI limit, the APR rule caps qualifying loans at 2.25 percentage points above the average prime offer rate.

This requires the creditor to consider the borrower’s present and reliable future income – outside of their real property – as well as debts. The DTI limit potentially reduced credit access for borrowers with a good credit standing, particularly low-to-moderate-income borrowers.

Seasoned QM rule

The seasoned QM rule allows loans that do not meet QM criteria to become a qualified mortgage. However, the lender must hold them in their portfolio for a 36-month seasoning period. The CFPB chose 36 months based on the reasoning that the earlier the delinquency, the more likely it is that the consumer couldn’t pay the loan from the start. That’s different from defaulting as a result of a change in circumstance.

The loan must also meet the following criteria:

• Loan term does not exceed 30 years
• Loan has a fixed rate with equal monthly payments
• No balloon payments.
• Must be secured by a first lien
• The points and fees do not exceed 3% the loan amount
• There can be no more than 2 delinquencies of 30 or more days

2025 update

The ATR/QM was updated for 2025 to reflect changes in the Consumer Price Index. In its final rule amending Regulation Z, the CFPB increased limits on points and fees.

The CFPB also adjusted APR limits for qualified loans. To be a QM, the APR on the loan cannot exceed the average primate rate by a specific number of percentage points.

ATR/QM rule vs. non-QM loans

An alternative to the ATR/QM rule are non-QM loans, which are mortgages that do not meet qualified mortgage criteria. These loans typically allow for looser credit requirements and higher debt-to-income ratios. However, non-QM loans still need to meet the ability-to-repay rule, so borrowers aren’t taking out mortgages they can’t afford.

This type of mortgage can be useful for self-employed, gig workers who have an unpredictable income. According to a 2024 report from TransUnion, 62% of U.S. adults earn income from one or more gig platforms. However, non-QM loans can also have higher interest rates, stricter eligibility requirements, and a more complicated qualification process.

How the ATR/QM rule affects different borrowers

The ATR/QM rule applies to all mortgage borrowers, but its impact varies depending on specific factors:

• First-time home buyers: Though the ATR/QM rule does not only apply to first-time home buyers, it can help that first-time home buyers are taking on a mortgage they’ll be able to afford.
• High-DTI borrowers: Though the DTI limit for the ATR/QM rule is now based on home price, borrowers with a high DTI will likely have fewer mortgage options and will likely have to pay a higher interest rate.

What doesn’t fall under the ATR/QM rule

The ATR/QM rule applies to almost every mortgage loan. However, exemptions exist, and transactions outside that definition aren’t covered under the ATR/QM rule. For example, borrowing against your home’s equity through a reverse mortgage falls outside the qualified mortgage rule.

Other exemptions include:

• Very short-term bridge loans, which provide short-term financing
• Some types of loan modifications (versus certain forms of refinancing)
• Time-share plans
• Open-end credit plans (like home equity lines of credit)
• Construction periods with terms under 12 months
• Consumer credit transactions secured by vacant land

The rule also creates an exemption for refinancing nonstandard homeowners loans into standard loans. However, this only applies if you continue to hold the loan and it meets specific conditions after refinancing. Some loans offered through particular creditors or loan programs may also be exempt under certain conditions.

The bottom line: The ability to repay rule offers borrower protection

The ATR/QM rule works to protect borrowers by holding lenders to higher standards - without compromising a consumer’s access to credit. The rule encourages safe lending so that homeowners are issued loans with fair terms that they can afford to repay. The Dodd-Frank Act has undergone several amendments and the Consumer Financial Protection Bureau itself has gone through some major changes. However, what remains true is that lenders have to verify your financial information before they can issue you a mortgage.

If you’re ready to begin the home buying journey, take action and start your mortgage application online today with the Home Loan Experts at Rocket Mortgage^®.