What These Rules Mean for Your Mortgage Application
When you apply for a mortgage, your lender must follow federal consumer protection rules that Fannie Mae enforces through its purchase requirements. These rules exist to prevent predatory lending and ensure you can afford your mortgage payments.
The most important rule affects nearly every conventional mortgage: the Qualified Mortgage standard. Your loan must be "fully amortizing," meaning each payment reduces your principal balance. Interest-only loans and payment-option ARMs don't qualify.
Your mortgage term cannot exceed 30 years. This eliminates 40-year mortgages that some lenders offered before the financial crisis.
How Lenders Calculate Your Ability to Repay
Your lender must verify that you can afford the mortgage using specific calculation methods. For fixed-rate loans, they use your actual payment amount. For adjustable-rate mortgages, they must qualify you at the highest possible rate during the first five years.
Say you're getting a 7/1 ARM that starts at 4% but could adjust to 7% after seven years. Your lender must qualify you at 7%, not the initial 4% rate. This ensures you can handle payment increases when the rate adjusts.
The lender must document your income, assets, and employment according to standard verification requirements. They cannot rely on stated income or skip verification steps.
Points and Fees Limitations That Affect Your Closing Costs
Your total points and fees cannot exceed 3% of your loan amount for most mortgages. This cap includes origination fees, discount points, mortgage broker fees, and certain third-party charges.
On a $400,000 loan, your points and fees cannot exceed $12,000. If your lender quotes fees above this threshold, the loan won't qualify for Fannie Mae purchase.
The calculation includes some closing costs but excludes others. Title insurance, appraisal fees, and credit report costs typically don't count toward the limit. Origination fees, broker compensation, and discount points always count.
Interest Rate Restrictions You Need to Know
Your mortgage's annual percentage rate cannot exceed the Average Prime Offer Rate by more than 2.25 percentage points on the day your rate is locked. The APOR represents average market rates for similar loans.
If the APOR for 30-year fixed mortgages is 6.5% when you lock your rate, your APR cannot exceed 8.75%. Loans above this threshold become "higher-priced" and face additional restrictions.
This rule prevents lenders from charging excessive interest rates relative to market conditions. It also affects which loan products your lender can offer.
Higher-Priced Mortgage Loan Restrictions
If your loan qualifies as a higher-priced mortgage loan, your options become more limited. Fannie Mae will only purchase fixed-rate mortgages or ARMs with initial fixed periods of 5, 7, or 10 years.
You cannot get a 3/1 ARM or other short-term adjustable product if your loan is higher-priced. This restriction aims to prevent payment shock from frequent rate adjustments on expensive loans.
Higher-priced loans also face additional disclosure and counseling requirements that your lender must complete before closing.
HOEPA Loans That Fannie Mae Won't Buy
Fannie Mae will not purchase any loan that exceeds the Home Ownership and Equity Protection Act thresholds for primary residences. These "high-cost" mortgages have APRs or points and fees that exceed federal limits.
For most loans, HOEPA triggers when the APR exceeds the APOR by 6.5 percentage points or more, or when points and fees exceed 5% of the loan amount. These thresholds are much higher than the standard QM limits.
If your loan triggers HOEPA, you'll receive additional disclosures and have a three-day right to cancel after closing. Most mainstream lenders avoid HOEPA loans entirely.
Documents Your Lender Must Collect and Verify
Your lender must document compliance with these rules in your loan file. They need to calculate and document the points and fees total, verify the APR-to-APOR spread, and confirm the loan meets all QM requirements.
You'll see these calculations on your Loan Estimate and Closing Disclosure forms. The APR, finance charge, and amount financed must be calculated according to federal Truth in Lending rules.
Your lender must also maintain documentation showing they verified your ability to repay according to the specific standards in the QM rule.
Common Issues That Can Derail Your Application
The 3% points and fees cap catches many borrowers by surprise. If you're paying discount points to buy down your rate, origination fees, and mortgage broker compensation, you can hit this limit quickly.
ARM qualification at the maximum five-year rate eliminates many borrowers who could afford the initial payment but not the fully-adjusted payment. This is especially challenging when interest rates are rising.
Some loan products that seem conventional don't meet QM standards. Interest-only periods, balloon payments, and negative amortization features all disqualify a loan from QM treatment.
Why These Rules Exist
These requirements stem from the 2008 financial crisis, when many borrowers received mortgages they couldn't afford. The Dodd-Frank Act created the Qualified Mortgage standard to ensure lenders verify borrowers' ability to repay.
The points and fees cap prevents lenders from loading excessive costs into mortgages. The APR-APOR spread limit prevents predatory interest rates that exploit borrowers with limited options.
Fannie Mae enforces these rules by refusing to purchase non-compliant loans. Since most lenders sell their mortgages to Fannie Mae or Freddie Mac, this creates strong incentives for compliance.
References
For the official guidelines, see 4202.2: Specific Mortgage types and regulations in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Home Ownership and Equity Protection Act of 1994 (HOEPA) Mortgages
Higher-Priced Mortgage Loans (HPMLs) and Higher-Priced Covered Transactions (HPCTs)
(a)
HOEPA Mortgages
For Primary Residences, purchase transaction Mortgages and refinance Mortgages that exceed the thresholds under HOEPA and its implementing regulations are ineligible for purchase by Freddie Mac.
(b)
HPMLs and HPCTs
For Mortgages with Application Received Dates on or after October 15, 2014
, Freddie Mac will purchase HPMLs and HPCTs, as defined in the
Glossary
, under the terms of the Purchase Documents and this section.
HPMLs and HPCTs eligible for sale to Freddie Mac must be one of the following Mortgage Products:
A fixed-rate Mortgage
An ARM with an Initial Period of five, seven or 10 years
For additional information regarding Freddie Mac HPML and HPCT requirements, see the following:
Additional information regarding Freddie Mac HPML and HPCT requirements
®
®
(c)
ATR/QM Rule eligibility and compliance
This section provides the requirements related to the ATR/QM Rule and specifies which Mortgages Freddie Mac will purchase and under what conditions those Mortgages will be purchased.
Note: For ATR Covered Mortgages originated under the GSE Patch, Construction One-Time Close Construction to Permanent Mortgages with Application Received Dates prior to July 1, 2021 and Settlement Dates before March 1, 2022 are eligible for sale to Freddie Mac if originated in accordance with the GSE Patch.
(i)
Glossary
definitions related to the ATR/QM Rule and are incorporated within this section for ease of use:
Glossary
definitions related to the ATR/QM Rule
ATR Covered Mortgage
An ATR Covered Mortgage is a consumer credit transaction secured by a dwelling that is covered by the ATR/QM Rule and is not an Exempt Mortgage.
ATR/QM Rule
Regulation Z’s Ability to Repay (ATR) rule (12 C.F.R. § 1026.43) that implements the Truth in Lending Act’s provisions requiring a creditor to determine a Borrower’s ability to repay a Mortgage loan. QMs are a subset of loans under the ATR requirements.
Exempt Mortgage
There are two classifications of Exempt Mortgages, as follows:
TILA Exempt Mortgage:
A TILA Exempt Mortgage is a Mortgage exempt from TILA and, as such, is exempt from the ATR requirements in Regulation Z. TILA Exempt Mortgages include business purpose loans as defined in 12 C.F.R. § 1026.3.
ATR Exempt Mortgage:
An ATR Exempt Mortgage is a Mortgage that is exempt from the ATR requirements in Regulation Z as set forth in 12 C.F.R. § 1026.43(a)(3)
GSE Patch
GSE Patch refers to the Consumer Financial Protection Bureau (CFPB) temporary QM rule definition in Regulation Z, 12 C.F.R. § 1026.43(e)(4), that became effective January 10, 2014, under which Mortgages were considered to be QMs if they satisfied certain requirements and were eligible for purchase by Freddie Mac.
PSPA
Amended Senior Preferred Stock Purchase Agreement by and between Freddie Mac and the Treasury.
QM
A qualified mortgage as defined in the ATR/QM Rule.
Revised General QM Rule
Revised General QM Rule refers to the CFPB QM rule in Regulation Z, 12 C.F.R. § 1026.43(e)(2) that became effective on March 1, 2021.
(ii)
Eligibility requirements for ATR Covered Mortgages and Exempt Mortgages
(A)
ATR Covered Mortgages
All ATR Covered Mortgages must meet the requirements of the Revised General QM Rule.
1
2
1026.43(e)(2)(i)
Mortgage must be fully amortizing with regular periodic payments that are substantially equal and that do not result in an increase of the principal balance or allow the Borrower to defer repayment of principal.
1026.43(e)(2)(ii)
Mortgage term cannot exceed 30 years.
1026.43(e)(2)(iii)
Mortgage must not exceed the applicable points and fees limitations specified in the Revised General QM Rule.
1026.43(e)(2)(iv)
The monthly payment for Mortgage-related obligations must be taken into account when underwriting the Mortgage using:
The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due
Periodic payments of principal and interest that will repay the loan amount over the loan term
1026.43(e)(2)(v)
Mortgage must meet consider and verify requirements specified in the ATR/QM Rule.
1026.43(e)(2)(vi)
Mortgage must not equal or exceed the applicable APR-APOR QM spread thresholds specified in the Revised General QM Rule.
1
Chart is included for illustrative purposes only. Sellers remain responsible for compliance with all aspects of the ATR/QM Rule, including the Revised General QM Rule requirements.
2
Regulatory section references are to the Revised General QM Rule at 12 C.F.R. § 1026.43.
(B)
Exempt Mortgages
Exempt Mortgages are not subject to the Revised General QM Rule; however, they must meet:
Points and fees limitations set forth below for Exempt Mortgages; and
Annual percentage rate (APR)/average prime offer rate (APOR) threshold limitations set forth below for Exempt Mortgages
Sellers are responsible for determining whether the Mortgage is an Exempt Mortgage.
(iii)
(A)
Points and fees limitations for ATR Covered Mortgages
ATR Covered Mortgages with points and fees exceeding 3% of the total loan amount (or such other applicable limits for lower-balance Mortgages) as specified under the Truth in Lending Act and its implementing regulations, 12 C.F.R. 1026.43(e)(3), will not be eligible for sale to Freddie Mac. Sellers must use the points and fees calculation that is required for QMs under the Truth in Lending Act and its implementing regulations that are found at 12 C.F.R. 1026.43(e)(3) and 12 C.F.R. § 1026.32(b) to determine compliance with applicable requirements.
(B)
Points and fees limitations for Exempt Mortgages
Exempt Mortgages will be eligible for sale to Freddie Mac if the following conditions are met:
Such Mortgages are exempt from Regulation Z, 12 C.F.R. § 1026.43(a) (ATR Exempt Mortgages) or are not subject to the Truth in Lending Act (TILA Exempt Mortgages); and
The points and fees do not exceed 5% of the total loan amount. Sellers must use the points and fees calculation that is required for high-cost Mortgages under HOEPA and its implementing regulations, 12 C.F.R. § 1026.32(b).
(iv)
(A)
Permissible spread
The permissible spread between the APR and the APOR on the date the interest rate is set depends on ATR coverage:
ATR Covered Mortgages:
The Mortgage’s APR may not exceed the APOR by 2.25 percentage points or more or such other applicable threshold as specified in the Revised General QM Rule for ATR Covered Mortgages, calculated in accordance with the provisions of that rule; and
Exempt Mortgages:
The Mortgage’s APR may not exceed the APOR by 6.5 percentage points or more for TILA Exempt and ATR Exempt Mortgages calculated in accordance with the provisions of the ATR/QM Rule
(B)
Short-term ARMs QM APR Calculation
For all ARMs with an initial fixed period of five years or less that are ATR Covered Mortgages, Sellers must calculate the APR in accordance with the Revised General QM Rule.
Note: When calculating the APR for APR-APOR threshold purposes for 3/6-Month SOFR and 5/6-Month SOFR ARMs that are ATR Covered Mortgages, Sellers must calculate the APR using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due.
(v)
Term – Interim Construction Financing
Sellers must structure any Interim Construction Financing to be exempt from the ability to repay provisions of Regulation Z, 12 C.F.R. § 1026.43(a)(3) so that the Mortgage term does not exceed 30 years.
(vi)
Life of loan representation and warranty
Sellers are responsible for representations and warranties related to requirements set forth in
Section 4202.2(c)
for the life of the loan, and Freddie Mac’s rights to exercise remedies related to violations of these requirements will not be waived.
(vii)
Determination of regulatory compliance with the ATR/QM Rule
Freddie Mac will not determine whether a Mortgage, including a Mortgage assessed through Loan Product Advisor
®
or Loan Product Advisor asset and income modeler, or delivered through Loan Selling Advisor
®
, complies with or is exempt from the ATR/QM Rule, including the Revised General QM Rule, or whether a Seller’s designation of the status of a Mortgage under the Revised General QM Rule is correct.
These determinations of compliance with the Revised General QM Rule and other applicable laws are the Seller’s responsibility.
(viii)
Responsible lending
In addition to ensuring compliance with applicable laws, Sellers must ensure that all ATR Covered Mortgages satisfy the QM requirements of the Revised General QM Rule, even if the Seller is not required by law or regulation to comply with the Revised General QM Rule.
(ix)
Government funded, guaranteed or insured Mortgages
Chapter 4205
for government funded, guaranteed or insured Mortgages.
(x)
Assumptions
Sellers must comply with the Revised General QM Rule with respect to a Borrower’s assumption of a Mortgage when the assumption is being used, in whole or in part, to acquire title to the Mortgaged Premises or is otherwise an ATR Covered Mortgage.
(xi)
Other Guide provisions related to the ATR/QM Rule
Refer to the following Guide provisions for additional information related to ATR/QM Rule eligibility and compliance:
Guide provisions for additional information related to ATR/QM Rule eligibility and compliance
Sections 1301.2
and
4202.1(a)
Sections 1301.6(a)
and
1301.6(c)
Section 4202.2(b)
and
Section 4204.3(a)
