How Buffers Limit Your Mortgage Borrowing

Buffers Limit Mortgage BorrowingQuestion: 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 which says you can’t go slower. The same idea applies to most loans.

Why Lenders Use Mortgage Buffers

Under Wall Street reform 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 — the DTI — 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 as of December 2014 a quarter 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: One Equifax study, Zooming In on Undisclosed Debt, found that almost one-fifth 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.”

Buffers and Mortgage Impact

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 our 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 which other lenders who don’t buffer might grant.

For details and specifics speak with loan officers about buffering.


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