Unless you’re a bank or a mortgage loan officer whose job it is to review and approve mortgage applications, it’s not likely you’ve heard the little group of letters that has lenders and real estate agents anxious. Why? Because this brand new rule that goes into effect after the first of the year may QM and ATRkeep more buyers on the sidelines. That’s good and not so good news for real estate investors. So what’s all the uproar?

QM stands for Qualified Mortgage and it applies to all conventional mortgage loans, loans underwritten to Fannie and Freddie standards. Real estate investors who buy and hold typically use conventional financing for the purchase. A loan that is approved using QM guidelines means the lender followed additional lending rules and by following them escapes the possibility the lender will face a lawsuit from the borrower—the so-called “safe haven” for lenders.

One feature of the QM is the ATR which stands for “ability to repay.” Lenders use debt-to-income ratios when evaluating a loan request and follow general guidelines, but not hard and fast ratios. Say that a borrower’s debt to income ratio represents 45 percent of the gross monthly income. Today and in the past, a lender might very well approve that loan with other compensating factors such as excellent credit or a sizable down payment. The ATR rule now prohibits any loan where the borrowers have a debt ratio above 43. No compensating factors apply.  The loan may still be made, it’s just that the lender loses the safe-haven protection and will result in a non-conventional approval with a portfolio loan carrying higher rates.

And of course, higher rates mean fewer qualified buyers. The remedy is to put more money down to get a lower loan amount or a better rate but sometimes more money or lower rates aren't available. The full effects of the QM rule won’t be fully evaluated for some time and it was thought that the new requirements would be delayed for several months by the Consumer Financial Protection Bureau but it appears now that no respite is allowed. The other side of the coin? Fewer owner-occupied purchases and higher rents.