Question: My lender says that from this point forward he will only offer “qualified” mortgages. What’s a qualified mortgage?

Answer: Under the just-passed Wall Street Reform and Consumer Protection Act the government has established two essential mortgage loan categories. There are “qualified” mortgages and there are “unqualified” mortgages. Whether you’re a lender or a consumer you want to stay away from unqualified loans.

To be in the “qualified mortgage” category a residential loan must meet certain standards. For instance, negative amortization is not allowed. Balloon payments are prohibited. The loan application must include income and employment information – and the lender must verify that information. Prepayment penalties are allowed but on a limited basis: 3 percent during the first year of the loan term, 2 percent in the second year, and 1 percent in the third year.

You can, if you like, also get an “unqualified” loan. In this case the lender must set aside 5 percent of the loan amount in a reserve fund. Because of the reserve fund requirement few lenders will want to offer unqualified mortgages because bigger reserve requirements also mean a reduced ability to lend. Also, with unqualified loans prepayment penalties are banned.

Given the new rules your lender is likely to offer an array of conventional mortgages in addition to loans backed by the federal government, such as financing insured under the FHA and VA programs.

According to the House Financial Services Committee “lenders and mortgage brokers who don’t comply with new standards will be held accountable by consumers for as high as three years of interest payments and damages plus attorney’s fees (if any).” In addition, the new rules will protect borrowers against foreclosure when there are certain violations of these standards.

This is serious stuff, and for the first time federal rules – the rules that govern most home mortgages – hold lenders to tough, actionable standards when borrowers are abused.

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Need real estate advice? Peter G. Miller would like to hear from you. Send your questions to peter@ctwfeatures.com. Due to the volume received, not all letters may be answered.