Question: We have recently tried to qualify for a mortgage. We know that the new rules allow us to devote as much as 43 percent of our income to housing costs and monthly debts. However, the lender says if our monthly debts exceed 41 percent of our income that it will not give us a loan. How is this possible?
Answer: When you go down the highway the speed limit may be 65 but there’s no rule that says you can’t go slower. The same idea applies to most loans.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders have less liability if they make low-risk “qualified mortgages,” financing that must meet certain standards. One of those standards is that the debt-to-income ratio is generally limited to not more than 43 percent of an individual’s income. If your household takes in $6,000 a month, then housing expenses, car loans, student debts, credit card payments and the like cannot top $2,580 per month.
But – in most cases – lenders are not required to go to the 43 percent limit. They can pick a lower DTI ratio. Research from the National Association of Realtors shows that nearly half of all lenders will not accept the 43-percent limit. Instead, they use “buffers,” meaning they might allow a DTI of not more than 41 percent, 42 percent or whatever.
Why? To make sure they, the lenders, do not accidentally go over the 43-percent limit when selling a loan to investors and thus violate underwriting standards because of undisclosed debt. This is a very real problem: A 2013 Equifax study found that nearly 20 percent of all mortgage borrowers apply for new credit in the midst of a mortgage. “Most borrowers,” says the report, “simply don’t realize how this new ‘undisclosed debt’ impacts their ability to qualify for their mortgage.”
This is a problem for marginally qualified borrowers. If they go to a lender who uses buffers their ability to borrow will be reduced when compared with lenders who allow the entire 43-percent DTI. For instance, if the household with the $6,000 gross monthly income is only allowed a 41-percent DTI then its monthly ceiling for expenses is $2,460 – $120 less than the 43-percent limit. With less income available for debts, marginally qualified borrowers may not be able to get the mortgage they want, a loan that other lenders who don’t buffer might grant.
For details and specifics speak with loan officers about buffering.
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